6.2 Taxes

6.2 a. Taxes on Sellers

Taxes on the seller are not directly levied on the buyer but on the seller. This creates an upward shift in the supply curve by the amount of the tax, and creates a new equilibrium in the market. With the upward shift of the supply curve, the demand decreases. This increases the buyer’s purchase price and lowers the amount received by the seller. The more elastic the demand, the more the seller pays. ^[5]

Example: Burden of taxes is on sellers selling water bottles.

^{Taxes on sellers [6]}

6.2 b. Taxes on Buyers

Taxes on a buyer are commonly excised through a sales tax as a percentage of the price of the good. The imposed cost by the government affects the equilibrium by shifting the demand curve downward by the size of the tax. The seller receives less in new tax equilibrium while the buyer pays more for the good. The more inelastic the demand, the more the buyer pays. ^[5]

Example: Taxes are mainly paid by buyers on cigarettes.

^{Taxes on buyers [7]}

6.2 c. Elasticity and Tax Incidence

When a tax is introduced in a market with an inelastic supply, sellers have no choice but to accept lower prices for their business. If the supply were elastic and sellers had the possibility of reorganizing their businesses to avoid supplying the taxed good, the tax burden on the sellers would be much smaller, and the tax would result in a much lower quantity sold instead of lower prices received. ^[8]

Example: In the case of smoking, the demand is inelastic because consumers are addicted to the product. The government can then pass the tax burden along to consumers in the form of higher prices without much of a decline in the equilibrium quantity. ^[8]

^{Tax Incidence [9]}