Which of the following best describes the effect of income taxes in the context of price ceilings, price floors, and black markets?

• A. Encouraging the formation of legal markets for all goods
• B. Increasing the equilibrium price above the price ceiling
• C. Reducing the quantity of goods supplied by decreasing producers' after-tax income
• D. Eliminating the need for price ceilings and price floors in the market

Answer: (C)

Verified step by step guidance

1. Understand the role of income taxes in a market: Income taxes reduce producers' after-tax income, which affects their willingness to supply goods at any given price.
2. Recall the effects of price ceilings and price floors: Price ceilings set a maximum price below equilibrium, often causing shortages, while price floors set a minimum price above equilibrium, often causing surpluses.
3. Analyze how income taxes interact with these price controls: Since income taxes reduce producers' net earnings, they effectively decrease the incentive to supply goods, shifting the supply curve leftward.
4. Consider the impact on quantity supplied: With lower after-tax income, producers supply less at every price, which aligns with the idea of reducing the quantity of goods supplied.
5. Conclude that income taxes do not increase equilibrium prices above price ceilings or eliminate the need for price controls, but rather reduce supply by decreasing producers' after-tax income.