Question

1. Give two examples of how taxes and subsidies might inversely shift the supply curve, with one example of an increase in demand (a right shift), and the other example being a decrease in demand (a left shift).

2. Provide two examples of how taxes and subsidies might directly shift the supply curve, with one example of an increase in demand (a right shift), and the other example being a decrease in demand (a left shift).

Answer 1

1.The diagram for rise in taxes is the same for a fall in subsidies.The demand curve shifts to the left by the amount of fall in subsidy.

A rise in taxes shifts the demand curve to the left by the amount of the tax.Price paid by consumers is Pd and price received by the supplier is Ps.Since the price received by the supplier is less than the equilibrium price,the quantity supplied falls and supply curve shifts to the left.Price rises to Pd and quantity falls to Q2.

2.Fall in taxes=increase in subsidy

The demand curve shifts to the right raising price.As price rises the supply rises and supply curve shifts to the right.Price falls but quantity rises to Q3.