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Elasticity Tax
The burden of a tax on a commodity is shared between the sellers (or producers) and buyers of the commodity. We are now interested in showing how the burden of a commodity tax on buyers and sellers depends on the elasticizes of demand and supply. Two important taxes are levied on a commodity and apart of thee taxes is passed on the consumers. First the excise duty is imposed on the production of a commodity. The producers of the commodity try to shift the burden of excise duty to the buyers by raising the price of the commodity. Secondly sales tax is levied o the sales of a commodity on the sellers of the commodity. Sellers also try to shift the burden of sales tax to the buyers by including it in the price of the commodity. However whatever the intentions of the producers or sellers to shift the burden of commodity tax actual burden borne by buyers and sellers depends on the elasticityies of demand and supply. The money burden of a tax on buyers and sellers is called incidence of a tax.
A commodity tax, excise duty or sales tax drives a wedge between the price paid by the buyers and the price received by the sellers. Suppose now sales tax equal to CB per unit is impose. The producers or sellers will be willing to sell a given quantity of a commodity, if they receive the same net prices as before. That is the producers or sellers will treat the sales tax CB per unit as an extra cost of production and therefore they would add it to the cost per unit. As a result of the imposition of a sales tax per unit of the commodity supply curve will shift upward to S2 and will be parallel to the supply curve S1 without a tax.
It follows from above that he burden or the incidence of taxes borne by the producers and the consumers will depend upon the elasticity of demand as well as elasticity of supply. The lower the elasticity of domed the greater will be the indict dance of tax borne by the consumers.
If the demand for a commodity is perfectly inelastic the whole of the burden of the commodity tax will fall on consumer. As a result of the intersection of the demand and supply curves price OP is determined if now the tax equal to SS is imposed on the commodity the supply curve will shift vertically upwards to the dotted position SS it will be seen that the new supply curve SS intersects the demand curve DD at point E and the new equilibrium price OP is determined. It therefore follows that in case of perfectly inelastic demand the whole incidence of the indirect tax falls on the consumers.
On the contrary if the consumer demand for a quantity is perfectly elastic as is shown by DD curve the imposition of the tax on it will not cues any rise in price. In this cse the while burden of commodity tax will be borne by the manufactures or sellers.. As a result of the indirect tax by the amount SS and the resultant upward shift in supply curve to SS the equilibrium price remains unchanged at the leve OP. since the price has no risen the consumer would not bear any burden of the tax in this case. Therefore the whole incidence of the tax will fall on the producers or sellers in case of perfectly elastic demand.
It should be noted that the more inelastic the demand for a commodity the greater the rise in the price paid by the consumers and the vice versa.
The predictions about the incidence of taxes borne by the consumers and the producers have been generally found to be true in the real world situation when the commodities on which taxes are imposed are sold under competitive conditions.
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A commodity tax, excise duty or sales tax drives a wedge between the price paid by the buyers and the price received by the sellers. Suppose now sales tax equal to CB per unit is impose. The producers or sellers will be willing to sell a given quantity of a commodity, if they receive the same net prices as before. That is the producers or sellers will treat the sales tax CB per unit as an extra cost of production and therefore they would add it to the cost per unit. As a result of the imposition of a sales tax per unit of the commodity supply curve will shift upward to S2 and will be parallel to the supply curve S1 without a tax.
It follows from above that he burden or the incidence of taxes borne by the producers and the consumers will depend upon the elasticity of demand as well as elasticity of supply. The lower the elasticity of domed the greater will be the indict dance of tax borne by the consumers.
If the demand for a commodity is perfectly inelastic the whole of the burden of the commodity tax will fall on consumer. As a result of the intersection of the demand and supply curves price OP is determined if now the tax equal to SS is imposed on the commodity the supply curve will shift vertically upwards to the dotted position SS it will be seen that the new supply curve SS intersects the demand curve DD at point E and the new equilibrium price OP is determined. It therefore follows that in case of perfectly inelastic demand the whole incidence of the indirect tax falls on the consumers.
On the contrary if the consumer demand for a quantity is perfectly elastic as is shown by DD curve the imposition of the tax on it will not cues any rise in price. In this cse the while burden of commodity tax will be borne by the manufactures or sellers.. As a result of the indirect tax by the amount SS and the resultant upward shift in supply curve to SS the equilibrium price remains unchanged at the leve OP. since the price has no risen the consumer would not bear any burden of the tax in this case. Therefore the whole incidence of the tax will fall on the producers or sellers in case of perfectly elastic demand.
It should be noted that the more inelastic the demand for a commodity the greater the rise in the price paid by the consumers and the vice versa.
The predictions about the incidence of taxes borne by the consumers and the producers have been generally found to be true in the real world situation when the commodities on which taxes are imposed are sold under competitive conditions.
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