(Figure: Model of a Competitive Market) Use Figure: Model of a Competitive Market.Given the figure,if there are external costs,a tax imposed on sellers will:

A) decrease the equilibrium quantity.
B) increase the equilibrium quantity.
C) have no effect on the equilibrium price.
D) decrease the equilibrium price.

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Reagan Elsen · Accepted Answer

Final Answer : A, Explanation :  When there are external costs, the market is producing a greater quantity than the optimal level. Therefore, a tax imposed on sellers will increase their costs and decrease the supply, resulting in a decrease in equilibrium quantity. The equilibrium price may or may not change, depending on the magnitude of the tax and the responsiveness of supply and demand to price.

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