Using an appropriate diagram, show the effect of introducing a tax on a good. Does a deadweight loss necessarily result from the tax?

 

A tax on a good affect the supply as it increases the cost of production.

Step-by-step explanation

When a tax is imposed on a good it increases the cost of producing the good. This is because the tax acts as an extra cost. When the cost of production increases, the production decreases decreasing supply. A decrease in supply shifts the supply curve to the left as shown below.

The supply curve shifts from S to S₁. The shift in supply decreases quantity from Q to Q₁ and increases prices from P to P₁. The introduction of tax also causes a deadweight loss shown by triangle ABC. Before-tax supply was at Q but after tax, it decreases to Q₁ which decreases the economic efficiency. The imposition of tax also decreases the consumer surplus that is some of the tax is paid for by the consumer by the increase in prices.

Please see the attached file for the complete solution