Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?
A) The price paid by buyers increases and output declines.
B) The price paid by buyers does not change and output decrease.
C) The price paid by buyers and output increase.
D) The price paid by buyers and output decrease.

Question

Quizplus · Accepted Answer

In a perfectly elastic market demand curve, producers can sell any quantity of the product at the same price. Therefore, they cannot pass on the output tax to the buyers in the form of increased prices. As a result, the entire tax burden falls on the producers, reducing their profits. This leads to a decrease in supply and output, while the price paid by buyers remains the same. Therefore, the market equilibrium outcome is a decrease in output with no change in the price paid by buyers.

Suppose the Market Demand Curve Is Perfectly Elastic in an Increasing-Cost