Per-Unit Tax on Producers
The question
The government of Halvern, needing new revenue, begins charging firms a tax of a fixed dollar amount on every unit of output they produce. The tax is collected from the firms themselves, and a firm owes it on each unit whether or not that unit earns a profit. Assume the central bank takes no action. Show the short-run effect of this tax on Halvern's economy, holding all else constant. Show the effect on the Fiscal Policy (AD-AS) graph.
Equilibrium at Real GDP (Y) 92, Price Level (PL) 66
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Per-Unit Tax on Producers: the worked answer
On the Fiscal Policy (AD-AS) graph, SRAS shifts left.
Why SRAS shifts left
A tax charged on each unit produced is part of what it costs a firm to bring that unit to market, so per-unit production costs rise for firms across the economy. At every price level the total output firms choose to produce is smaller, which shifts short-run aggregate supply to the left. The tax is not a government purchase, a transfer, or a change in households' take-home pay, so no component of aggregate demand moves. The economy's quantity of resources and its level of technology are unchanged as well, so long-run aggregate supply stays where it is.
What happens to the equilibrium
The equilibrium price level rises while real GDP falls, which is stagflation, and output ends up even further below the full-employment level marked by LRAS.
The mistake students make on this one
The common wrong answer shifts aggregate demand left, because a tax sounds like less money circulating and the personal income tax students meet most often does move that curve. What the tax is charged on decides which curve moves: this one is charged on each unit a firm produces, so it enters the model as a per-unit cost, while an income tax is charged on what households earn and works through disposable income. The aggregate demand answer also predicts a falling price level, and a tax on every unit produced pushes the price level up.
On exam day
Fiscal policy reaches this diagram two different ways: purchases, transfers, and taxes on income move total spending, while a tax or subsidy attached to each unit produced moves per-unit cost. Decide which of the two the stem describes before you draw anything.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when SRAS shifts left and every other curve on the Fiscal Policy (AD-AS) graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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