What Is The Impact Of Tax On Price And Quantity?


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Tariq Habib Profile
Tariq Habib answered
Government levy taxes on a wide variety of commodities, on cigarettes and alcohol, on payrolls and profits. Supply and demand analysis can help us predict who will bear the true burden of tax and how a tax will affect output.
As an example, we will look at the case of a gasoline tax to illustrate the way that taxes affect market output and price. Although American politicians periodically make a fuss about them, gasoline taxes are far lower in the United States than in most European countries, where gas taxes are $2 to $5 per gallon, as compared to around 50 cents on average in he United States. Many economists and environmentalists advocate many higher gasoline taxes for the United States. They point out that higher taxes would curb consumption, and thereby reduce pollution and our dependence on insecure foreign sources of oil.
For concreteness, say that the government decided to raise the tax by $1 per gallon. Prudent legislators would of course be reluctant to raise gas taxes so sharply without a firm understanding of the consequences of such a move. They would want to know the incidence of the tax. By incidence we mean the ultimate economic impact or burden of a tax. Just because business write a check for the taxes does not mean that the taxes is fact reduce their profits.

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