Figure 5-5
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-5 illustrates the situation in the toilet paper market.
-Refer to Figure 5-5.Let's suppose the government imposes a tax of $50 per ton of toilet paper to bring about the efficient level of production.What happens to the market price of toilet paper?

Question

Figure 5-5  
Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. Figure 5-5 illustrates the situation in the toilet paper market.
-Refer to Figure 5-5.Let's suppose the government imposes a tax of $50 per ton of toilet paper to bring about the efficient level of production.What happens to the market price of toilet paper?

Quizplus · Accepted Answer

The tax effectively raises the cost of production for the companies producing toilet paper. As a result, the supply curve shifts up and to the left, leading to a higher equilibrium price. However, the extent to which the price rises depends on the elasticity of demand and supply for toilet paper. If demand and supply are relatively elastic, the price increase will be less than $50. If they are relatively inelastic, the price increase will be more than $50. Therefore, the correct answer is (C), it rises by less than $50.