Define market supply. What is the effect on the supply of a good when government imposes a tax on the production of that good? Explain.
Quantities of a particular commodity offered for sale by all the firms at different prices in the market is known as market supply. If government imposes heavy taxes on the production of a particular commodity, the cost of production increases, price remaining constant. This results in reduction in profits.
In this situation, the producer will shift his resources towards producing those commodities on which government has imposed less taxes. As a result, supply of the particular commodity decreases.