Question

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?

Answer 1

A perfectly elastic demand curve is horizontal, so the quantity demanded can be infinite as long as the price remains the same. Consumers will be willing to purchase all the goods supplied at that exact price.

If a tax is imposed to producers, then the supply curve will shift to the left. The shift will be equivalent to the value of T per unit. Since the price cannot be changed, then the only thing that will change is that total supply will decrease.