What happens when there is a per-unit tax?

• A. Upward shift in ATC
• B. Upward shift in MC
• C. Downward shift in MC
• D. No change in cost curves

Answer: (B)

A per-unit tax adds a fixed amount to the cost of producing each additional unit. That means the marginal cost, which is the cost of producing one more unit, rises by the tax amount. So the entire marginal cost curve shifts upward by the size of the tax. The average total cost also goes up because total cost increases by tax times quantity, but the direct and most precise effect described here is the upward shift of the marginal cost curve. The other options don’t capture this direct impact: the tax doesn’t cause a downward shift in marginal cost, and it does imply changes to cost curves overall (including ATC), but the immediate, defining change is the rise in marginal cost.