Effects of Taxes in Price Elasticity | avesisland.info
Tax incidence shows the effect a tax will have on the seller of the product and the consumer. Governments also can indicate who will hold the responsibility to. However, the amount of the price increase will depend on the elasticity of demand. Compare Figures 1 and 2 to see the difference. If you aimed as a government to tax goods simply to raise tax revenue, which type of good would you tax?. First, we must examine the difference between legal tax incidence and economic tax . The size of this share depends on relative elasticity – a concept we will As calculated, the government receives a total of $6 million in tax revenue, which .
But, if supply is more inelastic than demand, sellers bear most of the tax burden. Think about it this way—when the demand is inelastic, consumers are not very responsive to price changes, and the quantity demanded remains relatively constant when the tax is introduced. In the case of smoking, the demand is inelastic because consumers are addicted to the product.
Effect of tax – depending on elasticity | Economics Help
The seller can then pass the tax burden along to consumers in the form of higher prices without much of a decline in the equilibrium quantity. When a tax is introduced in a market with an inelastic supply—such as, for example, beachfront hotels—sellers have no choice but to accept lower prices for their business. Taxes do not greatly affect the equilibrium quantity.
The tax burden in this case is on the sellers.
Elasticity and tax revenue (article) | Khan Academy
If the supply were elastic and sellers had the possibility of reorganizing their businesses to avoid supplying the taxed good, the tax burden on the sellers would be much smaller, and the tax would result in a much lower quantity sold instead of lower prices received. You can see the relationship between tax incidence and elasticity of demand and supply represented graphically below. Two graphs that represent the relationship between elasticity and tax incidence.
Graph A shows the situation that occurs when demand is elastic and supply is inelastic— tax incidence is lower on consumers. Graph B shows the situation that occurs when demand is inelastic and supply is elastic—tax incidence is lower on producers.
In other words, of the total price paid by consumers, part is retained by the sellers and part is paid to the government in the form of a tax. However, the elasticity of the product determines the consumer's willingness to pay the higher prices resulting from the shift of the tax burden.
Tax Increase An increase in taxes affects everyone involved in the supply chain differently.
If the government imposes a tax on a supplier, that supplier might choose to pass on the tax burden to the manufacturer in the form of a price increase. If the finished product cannot absorb the tax burden, the manufacturer or the retailer might have to carry the tax burden or find other methods to absorb the tax. Shifting the burden of a tax is not always an economically feasible option, and the elasticity of demand will ultimately dictate the ability to shift the tax burden to another party.
Response The effect of any tax depends on the responses of both the consumer and producer. The burden of the tax will typically fall on the side of the market less-sensitive to price changes.
Elasticity and tax revenue
In most cases, both parties will invariably absorb some portion of the tax. Elasticity and Taxes About the Author Brian Bass has written about accountancy-related topics and accounting trends for "Account Today. Bass hold a master's degree in accounting from the University of Utah.