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Government Policies And Price Controls

 Government Policies and Price Controls


            All governments from the federal government in a developed nation’s centre to the local government in small towns use taxes to rise for public projects such as roads, educational institution and national defence.

            To determine the stage for our analysis, let us assume that a local government makes a decision to hold annual chocolate celebration with a conference. To increase revenue to pay for the event, the town settles on to levy a 0.25$ tax on the sale of chocolate bars.

            When the arrangement is proclaimed our lobbying groups swing into action. The National Organisation of chocolate makers declares that its members are struggling to live in a rivalled market and it bargains that consumers of chocolates are having trouble making ends meet and it argues that vendors of chocolates should pay tax.

            The mayor to compromise the consumers prescribes that one half of tax be paid by the consumers and other half by the vendors. When the government levies tax on a commodity that is to bear the burden, is it the consumers or the vendors or the people vending the commodity or else both the consumers and vendors mutually share. Hence the burden of tax has to be interfered by the government and decides on what proportion the tax has to be shared.

How Taxes on Consumers Affect Market Outcomes?

            Let us imagine a tax levied on consumers of a commodity. Presume for example, that the local government passes a law requiring consumers of chocolates to send 0.25$ to the government for every unit of chocolate they consume.

            To understand the law that affects the consumers and vendors of chocolates, we can pursue three steps in analysing supply and demand.

  1. Step 1

            The initial impact of the tax is on the demand for chocolates. The supply curve is not pretentious for the reason that for any provided price of chocolates, vendors have the same incentive to offer chocolates to the market. Alternatively, consumers now have to pay a tax to the government whenever thy purchase chocolates. Therefore, the tax shifts the demand curve for chocolates.

  1. Step 2

            The next step is to determine the direction of the shift. As the tax on buyers makes buying chocolates less attractive consumers demand a lesser volume of chocolates at each price. Consequently, the demand curve shifts to the left.

            In this case, we can be accurate about how much the curve shifts. As of the $0.25 tax levied on consumers the effective price to consumers is now $0.25 greater than the market price. For instance, if the market price of a chocolate bar happened to be $2.75, the effective price to consumers would be $3.00.

            As consumers look at their total cost including tax they demand a volume of chocolates as if the market price were $0.25 higher than it actually is. In other terms, to provoke consumers to demand any provided volume, the market price must now be $0.25 lower to make up for the effect of the tax. Therefore, the tax shifts the demand curve downward.

  1. Step 3

            After having ascertained how the demand curve shifts we can now see the effect of the tax by comparing the initial symmetry and the new symmetry. You can see in the figure that the symmetry price of chocolate drops from for example $3.00 to $2.85 and the symmetry volume drops from say 500 to 450 bars.

            As vendors vend less and consumers purchase less in the new symmetry the tax on chocolates decreases the dimension of the chocolate market.


            After following the above to steps the query of tax burden arises. Even then the consumers send the entire tax to the government, consumers and vendors share the burden. As the market price drops from $3.00 to $2.85 when the tax is brought into, vendors receive $0.15 less for every bar of chocolate than they did devoid of tax.

            Therefore, the tax makes vendors worse off. Consumers pay vendors a lower price $2.85, however the effective price including the tax rises from $3.00 before the tax to $3.25 with the tax ($3.00 + $0.25). Therefore, the tax also makes consumers worse off. With this sum up, the analysis gives in two notes.

  1. Taxes demotivate market activity. When a commodity is taxed, the volume of the commodity sold is smaller in the new symmetry.
  1. Consumers and vendors mutually share the incidence of tax. In the new symmetry consumers pay more for the commodity and vendors receive less.

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