What is an excise tax and how do excise taxes affect the supply curve?

What is an excise tax and how do excise taxes affect the supply curve?

Market equilibrium with taxes and subsidies

Excise taxes are indirect taxes levied on the consumption of certain goods or services (such as alcohol or hydrocarbons). They are linear in nature and unrelated to disposable income.

Excise taxes, in other words, are taxes that have a specific application since they affect only a certain group of goods and services that, given their characteristics or effects, are chosen by the government or the tax authority to be subject to a particular tax.

The Tax Agency is in charge of collecting the resources generated by excise taxes. However, this does not mean that it collects them directly, but that it chooses an agent to collect the tax who does not necessarily bear the burden of payment. Thus, for example, in the case of electricity, most of the payment of the tax is borne by the end consumers, but the company that supplies the electricity is responsible for collecting the tax money and delivering it to the Tax Agency.

Supply and demand with taxes

A tax on sellers of a good will shift the supply curve to the left until the vertical distance between the two supply curves equals the tax per unit; ceteris paribus, this will increase the price paid by consumers, which is equal to the new market price. and decrease the price received by sellers.[1] A subsidy on production will shift the supply curve to the left until the vertical distance between the two supply curves equals the subsidy per unit; ceteris paribus, this will increase the price paid by consumers, which is equal to the new market price.[1

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A subsidy on output will shift the supply curve to the right until the vertical distance between the two supply curves equals the subsidy per unit; ceteris paribus, the price paid by consumers will fall, which is equal to the new market price, and will increase the price received by producers. Similarly, a subsidy on consumption will shift the demand curve to the right; ceteris paribus, the price paid by consumers will fall while the price received by producers will increase by the same amount as if the subsidy had gone to producers. However, in this case, the new market price will be the price received by producers. The end result is that the lower price paid by consumers and the higher price received by producers will be the same, regardless of the administration of the subsidy.[1] In this case, however, the new market price will be the price received by producers.

Supply and demand exercises with solved taxes

Excise taxes are indirect taxes levied on the consumption of certain goods or services (such as alcohol or hydrocarbons). They are linear in nature with no relation to disposable income.

Excise taxes, in other words, are taxes that have a specific application since they affect only a certain group of goods and services which, given their characteristics or effects, are chosen by the government or the tax authority to be subject to a particular tax.

The Tax Agency is in charge of collecting the resources generated by excise taxes. However, this does not mean that it collects them directly, but that it chooses an agent to collect the tax who does not necessarily bear the burden of payment. Thus, for example, in the case of electricity, most of the payment of the tax is borne by the end consumers, but the company that supplies the electricity is responsible for collecting the tax money and delivering it to the Tax Agency.

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Effect of a tax on price and quantity

Governments can choose between taxes on citizens or on businesses to increase their revenue. When considering taxes on businesses, it should be considered that these will increase the price of goods produced and sold, resulting in a welfare loss. However, a distinction must be made between the loss in producer and consumer surplus. The impact on both surpluses depends on the period analyzed.

In the short run, both consumers and producers will suffer from the tax. A new tax increases the price of goods. For example, let’s say this tax is levied on companies that increase prices to cover their losses. In this case, as seen in the adjacent figure, supply will shift to the left decreasing the quantity produced, which increases prices as demand remains unchanged. Therefore, the new equilibrium price will be PD (if the tax is levied on consumers, there will be a shift in demand). A corresponds to the amount of the tax paid by consumers, while B is the amount paid by producers. In reality, only consumers pay more, although producers will sell less. The loss in consumer and producer surplus will depend on the elasticity of the demand curve as seen in the figures below. The lower the elasticity in absolute terms (left figure), the greater the loss in consumer surplus and the lower the loss in producer surplus. Higher elasticity (figure on the right) will have the opposite effect.

What is an excise tax and how do excise taxes affect the supply curve?
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