Which of the following statements about a unit tax of Rs t imposed on a competitive firm is NOT correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → It leaves the firm’s long run marginal cost unchanged, as it is a fixed sum.
A unit tax is paid on every unit sold. So it adds Rs t to the cost of each unit: both long run average cost and long run marginal cost rise by Rs t.
Option (1) It raises the firm’s long run average cost by Rs t at every level of output. — True. The firm pays Rs t extra on each unit.
Option (2) It shifts the firm’s long run supply curve to the left. — True. Higher LRMC means fewer units at any given price.
Option (3) It is a tax that the government imposes per unit sale of output. — True. This is what a unit tax is.
Option (4) It leaves the firm’s long run marginal cost unchanged, as it is a fixed sum. — False. The tax is not a fixed sum; it grows with output. One more unit brings Rs t more tax, so LRMC rises by Rs t.
NCERT (2026-27): “Impact of a unit tax on supply A unit tax is a tax that the government imposes per unit sale of output. For example, suppose that the unit tax imposed by the government is Rs 2. Then, if the firm produces and sells 10 units of the good, the total tax that the firm must pay to the government is 10 × Rs 2 = Rs 20. … Now, suppose the government puts in place a unit tax of Rs t. Since the firm must pay an extra Rs t for each unit of the good produced, the firm’s long run average cost and long run marginal cost at any level of output increases by Rs t.” “4.6 Market Supply Curve … Notice that the unit tax shifts the firm’s long run supply curve to the left: at any given market price, the firm now supplies fewer units of output.” |