The figure given below shows the demand and supply curves of automobiles. Figure 13.3 In the figure,
D: Demand curve of automobiles
S: Supply of automobiles prior to the tax
S+t: Supply of automobiles after the tax
-Figure 13.3 represents a situation of:

Question

The figure given below shows the demand and supply curves of automobiles. Figure 13.3  In the figure,
D: Demand curve of automobiles
S: Supply of automobiles prior to the tax
S+t: Supply of automobiles after the tax
-Figure 13.3 represents a situation of:

Quizplus · Accepted Answer

The figure shows a situation where the demand for automobiles intersects with the supply of automobiles prior to the tax at point A, which determines the equilibrium price and quantity. However, with the introduction of the tax, the supply curve shifts to the left from S to S+t. As a result, the new equilibrium point is B, where the price has increased and the quantity demanded has decreased. This situation represents a negative externality, where the production and consumption of automobiles have a harmful effect on society as a whole by polluting the environment, causing congestion, and increasing the risk of accidents. The tax is a way to correct this market failure and internalize the external cost by making the producers and consumers pay for it.

The Figure Given Below Shows the Demand and Supply Curves