In the subject of Economics, Supply and Demand play an important role. In Economics Tax effect on Supply and Demand can be significant. Taxes on goods and services can determine their cost and in turn their demand and supply.
Definition of Tax effect:
The primary reasons for any tax is to raise income or revenue from tax payers for the taxing authority as, to impose economic burden on those tax payers to alter the distribution or allocation of resources in the affected markets. By changing the distribution of resources that is the quantities produced and consumed, where a tax can also affect the economic efficiency with which the resources are employed. As a result, the analysis and consequences of tax consists of revenue, resource allocation, income distribution and economic efficiency. In case, if a tax is raised on a particular market, the direct effects can be examined in that market. Whereas, it’s indirect effects can cause an issue to other related markets.
The effect of Tax on a good:
Tax on a good is added to the marginal cost of seller of the goods. An illustration can explain the shift supply and demand curve. $1 of tax on one gallon diesel fuel will change the supply curve due to the amount of tax. The shifts in the supply curve, the equilibrium of price and quantity will also change because of tax. Eventually the impact on quantity and price will depend on the price elasticity’s of demand and supply.
In the above illustrated figure shows elasticity of demand and supply determine the impact of the tax. Here, the curve shifts upwards due to the amount of the tax. So, the equilibrium quantity falls and the equilibrium prices rises because of the tax. The decrease in the equilibrium of quantity creates a loss of consumer surplus and also producers’ surplus, which is known as deadweight loss from the tax. The size of the deadweight loss and the relative size of the impact on the price and quantity are varied. As, a result the supply curve and the demand curve have different price elasticity.
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