When a tax is placed on the sellers of a product

When a tax is placed on the sellers of a product, buyers pay

a. more, and sellers receive more than they did before the tax.
b. more, and sellers receive less than they did before the tax.
c. less, and sellers receive more than they did before the tax.

The correct answer and explanation is :

Correct Answer:
b. more, and sellers receive less than they did before the tax.

Explanation:

When a tax is imposed on the sellers of a product, the overall cost of supplying the product increases. To maintain their profit margins or minimize losses, sellers typically raise the price of the product. However, because demand is often sensitive to price, sellers cannot pass the full amount of the tax onto consumers—how much they can pass on depends on the price elasticity of demand and supply.

Here’s how the process works:

1. Tax Imposed on Sellers:
   The tax shifts the supply curve upward (or to the left) by the amount of the tax. This means that for every quantity, sellers now require a higher price to supply that quantity than they did before the tax.
2. New Equilibrium Price:
   Because of the upward shift in the supply curve, a new equilibrium is established at a higher price for buyers and a lower price received by sellers (after subtracting the tax). Buyers pay more than before, but sellers do not get the entire amount paid by buyers. Instead, a portion goes to the government as tax.
3. Seller’s Revenue:
   Although the market price is higher, the seller only receives the price paid by the buyer minus the tax. Therefore, the net price the seller receives is less than before the tax was implemented.
4. Buyer’s Cost:
   Buyers end up paying more because the price has increased. However, due to price sensitivity, they may also reduce the quantity they purchase, leading to an overall decrease in market efficiency.

Thus, buyers pay more, and sellers receive less, making option B the correct choice. This situation illustrates the concept of tax incidence, which refers to how the burden of a tax is shared between buyers and sellers, regardless of whom the tax is legally imposed upon.