Impact of direct tax on consumer equilibrium

Now, let's say In the above figure, the PCC has a positive slope.

Effect of subsidy on equilibrium price

Collection of indirect tax is certain as when there will be a sale of finish product the government generates revenue. It is found that many goods and services that are initially exempt from the main indirect taxes, such as the wholesale sales tax, have significant effective tax rates once taxes on inputs to industry are taken into account. The customers bear the final tax burden. Other stories. The effect of this type of tax can be illustrated on a standard supply and demand diagram. This is 3 million right over here. These concepts will be explored in more detail in later topics. The ability to pass the burden of the tax depends on price elasticity of demand and price elasticity of supply. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and a carbon tax discourages use of carbon-based fuels. Figure 4. Examples of direct taxes are corporate taxes, income taxes, and transfer taxes. A third purpose of taxation is Reprising. There are two things to notice about this example.

Rising prices and higher taxes leads to a sharp rise in total government tax revenue. No one's getting that white part right over there and this orange part right over here is eating into the consumer surplus, so now they're paying more than In general, tax can be defined as a levy or other type of a financial charge or fee imposed by state or central governments on legal entities or individuals.

effect of indirect tax on consumers and producers

Let us consider two commodities, namely commodity X and commodity Y. Therefore in most cases, consumers end up paying some or all of any indirect tax introduced into a market.

How to calculate consumer surplus after tax

Role of Elasticity and Competition The burden of an indirect tax can be passed onto the consumer by the producer - but not all of it. Tax burden evenly split In this case, the tax burden is split evenly between the consumer and producer. Prices of commodities increase with indirect taxes. Demerits of Indirect Taxes Fixed Income Class suffers from these taxes as prices of the products increase and their purchasing power shrinks. Governments use taxes to fund welfare and public services. Unfortunately, because increases in surplus overlap on our diagram, it becomes more complicated. The demand curve is inelastic because consumers are addicted to cigarettes and will pay the extra burden to continue to smoke them. Government wanted to correct the negative externalities which smoking has with it by imposing a tax, the tax would have to be very large. Below this green line was the producer surplus, above the green line and below this curve right here was the consumer surplus. The point Q represents the original equilibrium point, where the budget line is tangent to the indifference curve. Normally, this means transferring wealth from the richer sections of society to poorer sections. The equilibrium quantity looks like it's about a little bit more The size of this share depends on relative elasticity — a concept we will explore in the next section. It is found that many goods and services that are initially exempt from the main indirect taxes, such as the wholesale sales tax, have significant effective tax rates once taxes on inputs to industry are taken into account. So indirect tax are also a useful tool for the government.

So indirect tax are also a useful tool for the government. This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent on good 2. Before this whole area was a total surplus. With a subsidy, we want to do the same analysis.

Effect of tax on consumer and producer surplus

The new budget line is tangent to the indifference curve at point Q1. Despite the fact that the tax is levied on producers, the consumers have to bear a share of the price change. This is what the suppliers are going to get or the producers are going to get, but when you put a tax, the consumers are going to have to pay a dollar more. Let me shade it in. Second, it resulted in a deadweight loss because equilibrium quantity was too high. The middle fixed salry class suffer mostly by indirect tax. They want to tax hamburgers. Tax burden on producer When demand is elastic, the tax burden is mainly on the producer. You tend to buy more oranges and less apples since oranges are cheaper than apples. In figure 2, AB represents the original budget line.

This consumer knows the prices of goods 1 and 2 and has a fixed income or budget that can be used to purchase quantities of goods 1 and 2.

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IMPACT OF INDIRECT TAX