Ad Valorem Tax Shifts Supply Curve Upward

Steps:

• Ad valorem tax imposes a percentage of the selling price on sellers, increasing their effective cost per unit.
• This creates a wedge: buyers pay higher price, sellers receive lower net price.
• New supply curve shifts vertically upward by the tax rate times price, remaining parallel to original S.
• Equilibrium moves leftward along D, reducing quantity and raising price.

Why D is correct:

• D depicts the parallel upward shift of S, matching the tax incidence where supply reflects higher costs per economic principle of tax shifting.

Why the others are wrong:

• A: Shows downward shift, which would imply subsidy, not tax.
• B: Indicates horizontal shift, ignoring percentage-based vertical wedge.
• C: Suggests steeper slope, but ad valorem tax preserves parallelism.

Final answer: D