Imagine the government imposes an excise tax on sellers of soft drinks containing more than 10% sugar. Which effect is most likely in the market for soft drinks?

Question

BlackTom AI · Accepted Answer

An excise tax on sellers raises sellers’ per-unit cost, so the supply curve shifts left (a decrease in supply). Economically, an excise tax t per unit means sellers now require P_s = P_c - t (price received equals consumer price minus tax). The new market equilibrium satisfies D(Q) = S(Q) + t, which occurs at a lower quantity and a higher consumer price than before.

1) Relevant concepts
- Excise tax on sellers effectively increases marginal cost of supplying the taxed good, shifting the supply curve left (decrease in supply).
- Equilibrium is where demand equals effective supply; a leftward supply shift raises consumer price and reduces quantity.
- Tax incidence depends on elasticities, but the general directional effects (higher consumer price, lower quantity) hold.

2) Step-by-step reasoning
- Start with original equilibrium: D(Q0) = S(Q0), price P0, quantity Q0.
- With a per-unit tax t on sellers, the condition becomes D(Q1) = S(Q1) + t.
- Graphically this is the supply curve shifted vertically/up by t (or leftward), so intersection with demand moves up along demand to a new point.
- Result: Q1 < Q0 (quantity falls). Consumer price P_c rises above P0; seller’s net-of-tax price P_s = P_c - t is below P0.

3) Algebraic intermediate step (conceptual)
- Original: P0 = D(Q0) = S(Q0).
- With tax: P_c such that D(Q1) = S(Q1) + t → consumer price P_c > P0, seller receives P_s = P_c - t < P0.

4) Why the correct answer is correct
- Option c explicitly describes a decrease in supply and the two standard equilibrium responses: higher price for consumers and smaller quantity consumed. That matches the standard result of an excise tax on sellers.

5) Why other options are incorrect
- a: An excise tax raises costs, so supply will not increase (option a is wrong).
- b: “Contraction in supply leading to a smaller quantity” states only the quantity effect but omits the associated higher price — an incomplete description; also “contraction” is less explicit about price.
- d: A tax on sellers does not increase demand; demand shifts are unrelated to imposing seller taxes.

Conclusion: The correct choice is c. This explanation confirms answer c.

Imagine the government imposes an excise tax on sellers of soft drinks containing more than 10% sugar. Which effect is most likely in the market for soft drinks?Single choice

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