HI Guys, Got this question fomm Q-Bank. The correct answer is B but why not C Which of the following is the most likely effect of fines and penalties that are only imposed on the seller in a market for illegal goods? A) The price will rise and the quantity supplied will remain the same. B) The price will rise and the quantity supplied will decline. C) The price will rise and the quantity supplied will increase. D) The price will remain the same but the quantity supplied will decline. Thanks in advance.
The only reason that the price is going to increase is due to the seller passing the majority of fines back on to the buyer. The sellers risk are higher and profit is less, so likely to supply less.
I would agree with B. Though in addition to the cost of the fine itself, the added risk and to the supplier and the resulting decrease in the supply would also put upward pressure on the prices.
The quantity won’t increase because the demand for the goods is not inelastic. Sure, the seller will require a higher price for the goods due to fines and penalties but that doesnt mean buyers will automatically purchase at the higher price…
I think it’s pretty straightforward. If there are fines and penalties for sellers only, they are going to charge more because of taking additional risk. Since prices are higher (for example, double), the quantity will decrease because some people won’t continue buying illegal goods - either can’t afford or not worth it, they might choose to switch to something else.
Like Judy dolls…