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How Taxes On Vendors Affect Market Outcomes

 How Taxes on Vendors Affect Market Outcomes

            Let us assume that tax has been levied on the vendors of a commodity. Believing the local government passes a law requiring vendors of chocolate bars to send $0.25 to the government for every unit of bar they vend. Then the effects of the law would be as follows.

Step 1

            In this case, the instant collision of the tax is on the vendors of chocolates. For the reason that the tax is not levied on buyers, the volume of chocolates demanded at any provided price is the same therefore the demand curve does not vary. Alternatively, the tax on vendors makes the chocolate business less gainable at any provided price, so it moves the supply curve.

Step 2

            As the tax on vendors raises the cost of manufacturing and vending chocolate, it decreases the volume supplied at every price. The supply curve shifts to the left. Once again we can be exact about the scale of the movement.

            For any market price of chocolate the effective price to vendors – the amount they acquire to keep after paying the tax is $0.25 lesser. For instance, if the market price of a bar ensues to be $3.00, the effective price received by vendors would be $2.75.

            Whatever the market price, vendors will supply a volume of chocolate as if the price were $0.25 lesser than it is. If we put differently, to provoke vendors to supply any provided volume the market price must now be $0.25 higher to compensate for the effect of the tax.

Step 3

            After having ascertained how the supply curve moves, we can now contrast the original and the new symmetry. The symmetry price of chocolate rises from $3.00 to $3.25 and the symmetry volume drops from 500 to 450 bars.

            Once again, the tax decreases the dimension of the chocolate market. And once again consumers and vendors share the burden of the tax. For the reason the market price increases consumers pay $0.25 more for every unit of bar than they did before the tax was levied.

            Vendors receive a higher price than they did devoid the tax however the effective price drops from $3.00 to $2.75.


            Taxes on consumers and taxes on sellers are alike. In both the cases the tax places a block amidst the price that consumers pay and the price that vendors get. The block amidst the consumers’ price and vendors’ price is the same in spite of whether the tax is levied on consumers or vendors.

            In both the cases, the block shifts the relative position of the supply and demand curves. In the new symmetry, buyers and sellers share the burden of the tax. The only dissimilarity amidst taxes on consumers and taxes on vendors is who sends the money to the government.

            The equivalence of these two taxes is simple to understand if we imagine that the government collects the $0.25 chocolate tax in a bowl on the counter of every chocolate store. When the government levies the tax on consumers, the consumer is required to place $0.25 in the bowl every time a bar is brought.

            When the government levies the tax on vendors, the vendor is required to place $0.25 in the bowl after the sale of each bar. Whether the $0.25 goes directly from the consumer’s pocket into the bowl or indirectly from the consumer’s pocket into the vendors hand and then into the bowl, does not matter.

            Once the market arrives at its new symmetry consumers and vendors share the incidence of tax, despite the consequences of how the tax is levied.

Elasticity And Tax Burden

            When a commodity is taxed, consumers and vendors of the commodity share the burden of the tax. However how precisely is the tax burden divided, seldom shared equally. To overlook how the incidence is divided, let us assume the collision of taxation in the two markets.

            In both the cases, the original demand curve, the original supply curve and a tax that drives a block amidst the amount paid by the buyers and the amount got by the vendors. The difference is the relative elasticity of supply and demand.

Case Study on Who pays the Luxury Tax

            The objective of tax was to increase government’s revenue from those who could most simply afford to pay. For this reason only the wealthy could afford to buy such reckless spending, taxing luxuries seemed a logical way of taxing the rich.

            Yet, when the forces of supply and demand took over the outcome was somewhat different from what the political party intended. In the case of a commodity such as Yacht, the demand is somewhat elastic. A wealthy can simply buy not only yacht, but also villas to live in, take overseas trip etc.

            Alternatively, the supply of yachts is comparatively inelastic atleast in the short run. Yacht factories are not easily rehabilitated to alter purposes and labourers who construct yachts are not eager to amend jobs in response to variation in market stipulations.

            With elastic demand and inelastic supply, the burden of a tax drops extensively on the suppliers. That is, a tax on yachts places an incidence widely on the industries and workers who construct yachts as they end up acquiring a lower price for their commodity. The workers nevertheless, are not wealthy. Therefore, the incidence of a luxury tax drops more on the middle class than on wealthy. The erroneous presumptions about the burden of the luxury tax swiftly became apparent after the tax came into practice. Suppliers of luxuries made their political representatives well known of the economic adversity they practised and the political party repealed most of the luxury in tax in the later years of 1990s.

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