Question

For each of the following, draw demand and supply curves for cars to illustrate what happens to the market equilibrium when:

a) a per-unit tax of $10,000 is placed on cars.

b) the government commits to zero emissions in 2030, earlier than the market expected.

c) half of the sellers in the market decide to stop making cars

d) a large proportion of consumers decide to sell their cars and not buy a new ones.

Include an explanation for your figures.

Answer 1

a) The per unit tax reduces the supply of cars, shifting the supply curve towards the left, increasing the equilibrium price while reducing the equilibrium quantity of cars.

b) The zero emissions suddenly announced reduce the supply of cars in the market since most sellers were not prepared for it. The outcome is same as in a.

c) Again, the supply of cars decreases, shifting the supply curve to the left same as in a.

d) In this case also the supply of cars reduces, shifting the supply curve towards left, decreasing equilibrium quantity and price. This is shown in the figure.