Final answer:
Imposing an ad valorem or specific tax on sellers in a perfectly competitive market leads to an increase in equilibrium price and a decrease in equilibrium quantity, with the specific effects depending on the elasticity of supply and demand.
Step-by-step explanation:
If a tax authority imposes an ad valorem tax or specific tax upon sellers in a perfectly competitive market, the equilibrium price will increase and the equilibrium quantity will decrease. This effect occurs because the tax increases the sellers' costs, leading to a decrease in supply. As a result, the market price for consumers increases to cover the tax, while the quantity decreases due to fewer goods being supplied at the higher price.
The impact of the tax also depends on the elasticity of supply and demand. With an inelastic supply, such as beachfront hotels where suppliers cannot easily change the quantity they offer, the tax burden largely falls on the sellers, who must accept lower profits rather than substantially altering the quantity supplied. In contrast, if the supply were elastic, the sellers might reduce supply significantly or exit the market, leading to a larger decrease in equilibrium quantity and not as large an increase in price.