Imposition of an output tax on all firms in a competitive industry will result in:
A) a downward shift in each firm's marginal cost curve.
B) a downward shift in each firm's average cost curve.
C) a leftward shift in the market supply curve.
D) the entry of new firms into the industry.
E) higher profits for the industry as price rises.

Question

Quizplus · Accepted Answer

Imposing an output tax on all firms in a competitive industry will increase their costs of production, resulting in a leftward shift in the market supply curve as firms supply less output at any given price. Options A and B are incorrect because the marginal cost and average cost curves are not affected by the imposition of an output tax. Option D is also incorrect because output taxes would result in higher barriers to entry, discouraging new firms from entering the industry. Option E is incorrect because higher profits for the industry would not be expected in the face of higher costs for production.

Imposition of an Output Tax on All Firms in a Competitive