Answer to Question #259071 in Microeconomics for Sahlah Ahmed

Question

Navel oranges are grown in California and Arizona.

If Arizona starts collecting a specific tax per orange

from its firms, what happens to the long-run mar￾ket supply curve?

Answer 1

Step 1- If Arizona starts to collect a specific tax per orange from its firms, then the firms may be driven out of the market. In the figure given below, the price of oranges is on the vertical axis and quantity is on the horizontal axis, (a) is the amount of tax collected from the firms in Arizona, and LRSC is the long-term supply curve.

Due to the inclusion of tax, the price would tend to increase as shown in the figure.

Step 2 - Assume that all the firms in Arizona and California have initial costs to start their businesses. Therefore, a specific tax on oranges in Arizona and California may have two possible effects. Firstly, if the entry is unlimited by California firms, then the long-term supply curve will remain unaffected and all Arizona firms will be driven out of the market just because of their cost disadvantage

Secondly, if the entry is limited, then the long-term supply curve will become a step function, as shown in the figure. The quantity up to Q will be supplied by the firms of California, after which there will be an upward shift in the cost by the amount equal to the area of tax. As a result, supply will also shift upward and later the amount will be supplied by Arizona firms.