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 graph shows that at the current equilibrium point, the price and quantity of automobiles consumed are P1 and Q1 respectively. If a tax is placed on automobiles, the supply curve shifts upwards to S+t. This results in a new equilibrium point where price increases to P2 and quantity consumed decreases to Q2. This indicates that a tax on automobiles leads to a decrease in consumption and an increase in price. This situation is a classic example of a negative externality, where the social cost of producing and consuming automobiles is greater than the private cost. The tax is meant to internalize this externality by making the producer pay for the social cost of production, thus reducing the quantity demanded and bringing the market closer to the socially optimal level.

The Figure Given Below Shows the Demand and Supply Curves