A tax on the sellers of coffee will increase the price of coffee paid by buyers. Which of the following best explains why?

• A. The supply of coffee increases, causing prices to rise.
• B. The demand for coffee increases when a tax is imposed on sellers.
• C. Buyers are required by law to pay the tax directly to the government.
• D. Sellers pass some or all of the tax onto buyers through higher prices.

Answer: (D)

Verified step by step guidance

1. Understand the effect of a tax imposed on sellers: When a tax is levied on sellers, it effectively increases their cost of supplying the good.
2. Recognize that an increase in sellers' costs shifts the supply curve: Specifically, the supply curve shifts to the left (or upward), indicating a decrease in supply at every price level.
3. Analyze the new market equilibrium: With supply decreasing and demand remaining constant, the equilibrium price rises and the equilibrium quantity falls.
4. Explain tax incidence: The tax burden is shared between buyers and sellers depending on the relative elasticities of supply and demand, but sellers often pass some or all of the tax onto buyers through higher prices.
5. Conclude why buyers pay higher prices: Because sellers face higher costs due to the tax, they increase prices to maintain profitability, resulting in buyers paying more even though the tax is legally imposed on sellers.