Use the following to answer question:
Figure: Model of a Competitive Market
-(Figure: Model of a Competitive Market)Use Figure: Model of a Competitive Market.Given the figure,if there are external costs,a tax imposed on sellers will:
A)decrease the equilibrium quantity.
B)increase the equilibrium quantity.
C)have no effect on the equilibrium price.
D)decrease the equilibrium price.

Question

Use the following to answer question:
Figure: Model of a Competitive Market 
-(Figure: Model of a Competitive Market)Use Figure: Model of a Competitive Market.Given the figure,if there are external costs,a tax imposed on sellers will:
A)decrease the equilibrium quantity. 
B)increase the equilibrium quantity. 
C)have no effect on the equilibrium price. 
D)decrease the equilibrium price.

Quizplus · Accepted Answer

When there are external costs, the market is producing a greater quantity than the optimal level. Therefore, a tax imposed on sellers will increase their costs and decrease the supply, resulting in a decrease in equilibrium quantity. The equilibrium price may or may not change, depending on the magnitude of the tax and the responsiveness of supply and demand to price.

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