How does the imposition of a unit tax affect the supply curve of a firm?
A unit tax is a tax that the government imposes per unit sale of output. When a unit tax is imposed, the firm must pay an extra amount for each unit produced. This increases both the average cost and marginal cost at any level of output by the amount of the tax.
Due to this increase in production costs, the supply curve of the firm shifts to the left. This means that at any given market price, the firm now supplies fewer units of output compared to the situation before the tax was imposed. For example, if S⁰ is the supply curve before the tax, then S¹ (the supply curve after the tax) lies to the left of S⁰.
Explanation
The textbook explains that a unit tax increases both LRAC and LRMC by Rs t at any level of output. Since the supply curve is derived from the rising part of the MC curve (above minimum AC), an increase in MC shifts the supply curve leftward. The key points for a 3-mark answer are: (1) definition of unit tax, (2) effect on costs (both AC and MC increase), and (3) leftward shift of supply curve resulting in fewer units supplied at any given price.