Answer to Question #220667 in Economics of Enterprise for Sourabh Singh

Question

Using a demand and supply diagram, analyze the effect of introducing an indirect tax on a product on its equilibrium price and its equilibrium quantity.

Answer 1

An introduction of indirect tax on a product will cause a shift of the supply curve to the left implying that there will be a rise in price and a fall in quantity.

As shown by the diagram above, a decrease in supply will lead to a rise in the equilibrium price and a fall in equilibrium quantity.