An increase in a excise tax imposed on wine producers is likely to result in

Question

BlackTom AI · Accepted Answer

An excise tax on producers raises the per-unit cost of supplying the good, so the supply curve shifts left (upward), causing a higher equilibrium price and a lower equilibrium quantity — a contraction along the demand curve.

1) Relevant concepts
- Supply and demand curves: supply shows quantity sellers are willing to sell at each price; demand shows quantity buyers buy at each price.  
- A tax on producers is a cost increase for suppliers, which decreases supply (a leftward shift), not a change in buyers’ preferences (which would shift demand).  
- A shift in supply changes the market equilibrium price and quantity; the change in quantity demanded is a movement along the demand curve (expansion if price falls, contraction if price rises).

2) Step-by-step reasoning
- Before the tax: equilibrium at intersection of original supply S0 and demand D at price P0 and quantity Q0.  
- Producer excise tax increases marginal cost by t per unit. For any given price received by consumers, suppliers require a higher gross price to supply the same quantity; equivalently, for any pre-tax price sellers receive, consumers must pay an additional t to cover the tax. This is represented on the graph by shifting the supply curve leftward/upward from S0 to S1.  
- New equilibrium: S1 intersects demand D at a new point with price Pc > P0 and quantity Qc < Q0. Consumers face a higher price and buy less — that is a contraction (decrease in quantity demanded) along the unchanged demand curve.

3) Calculations / intermediates
- No numeric values given; conceptually: Q falls from Q0 to Qc, P rises from P0 to Pc. The vertical gap between S0 and S1 equals the tax t.

4) Why the correct answer is correct
- The tax directly affects producers’ costs → supply decreases (shift left). The resulting higher price causes buyers to purchase less → contraction along the demand curve. This matches option c.

5) Why other choices are incorrect
- a) wrongly shifts demand left (tax on producers does not change demand).  
- b) wrongly shifts supply right (tax reduces supply) and implies expansion of demand (opposite effect).  
- d) wrongly shifts demand right and expands supply (both opposite).

6) Conclusion
The correct outcome is a shift in the supply curve to the left and a contraction along the demand curve — option c, matching the provided answer.

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