Application: Sales & Excise TaxesGovernments have two goals when they place a tax on a good. • Raise Revenues• Discourage use
QuestionsDo taxes discourage consumption?What determines how much consumption falls?What determines the economic incidence of the tax? (Does the legal incidence matter?)What is the effect a tax on Economic Efficiency?
AnalysisSuppose we consider the market for gasoline. Suppose there is currently no tax. Then Supply and Demand determine the equilibrium:DSQPQe Pe
Suppose a sales tax of $.50 per gallon is placed on sellers (the gas station would have to pay the government $.50 for every gallon it sells). This tax is just like an increase in costs. The result is that the Supply curve will shift straight up by the amount of the tax. The shows that the seller needs 50 cents more per gallon to be willing to sell the same amount of gas as before the tax.
SDQP$1.40 QT QoSTPT
SDQP$1.40 QT QoSTPTSo quantity falls. And price rises. Thus, the seller is able to “shift the burden” of the tax onto the buyer.
But has the price risen by the full amount of the tax ($.50)?