Question

How does the supply curve shift when a tax is collected from the sellers?

Answer 1

Answer

Suppose per unit tax t is imposed on sellers. We can say that marginal cost of selling this good for will increase by t units. hence Marginal cost curve will shift upward by t units.

As Marginal cost curve is similar to supply curve and also this tax resulted in upward shift of Marginal cost curve. Thus Supply curve which is same as Marginal cost curve will shift upward or we can say that Supply curve will shift to the left.

Note : In order to maximize profit a competitive firm produces that quantity at which P = MC where P = Price and MC(Q) = Marginal cost is a function of Quantity(Q). Thus P = MC(Q) tells us the quantity a firm will produce at different price level and hence P = MC(Q) is similar to Supply curve and thus Marginal cost curve represents supply curve(Note upward sloping portion represents Supply curve)

Hence, when a tax is collected from the sellers then Supply curve will shift to the left where vertical distance between New supply curve after tax and initial supply curve (before tax) = per unit tax(t) imposed.