In a perfectly competitive market, which of the following will not occur as a result of an excise tax?
A)The market will under-produce relative to the efficient level.
B)Consumer surplus will be higher than with no tax since the tax is imposed on suppliers.
C)Producer surplus will be lower than with no tax.
D)The tax causes a deadweight loss.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, an excise tax will lead to a higher price for consumers and a lower price received by producers. The market will under-produce as a result because the tax increases the cost of production for suppliers. This leads to a deadweight loss, as some mutually beneficial trades no longer occur due to the tax. However, consumer surplus will not be higher than with no tax since the tax will shift the supply curve upward and to the left, leading to a decrease in consumer surplus. In a perfectly competitive market, both consumers and producers are price takers, which means that they have no market power to affect the market price. Therefore, an excise tax on suppliers will shift the supply curve upward by the amount of the tax, which will increase the price paid by consumers and reduce the price received by producers. As a result, the market quantity will decrease, and the market will under-produce relative to the efficient level, causing a deadweight loss.
Consumer surplus will decrease due to the higher price paid, and producer surplus will decrease due to the lower price received. However, the total tax revenue collected by the government may or may not exceed the deadweight loss, depending on the elasticity of demand and supply. Therefore, it is incorrect to say that consumer surplus will be higher than with no tax since the tax is imposed on suppliers.

In a Perfectly Competitive Market, Which of the Following Will