Question

Explain what would happen in the market for Halloween costumes if an excise tax were placed, to be paid by producers. Make a carefully labelled graph and explain in your own words.

Answer 1

Excise tax is levied on the specific goods. It is a tax on the goods imposed at the time of production and not at the point of sale in the market. These taxes are generally imposed on superfluous goods and services. The imposition of taxes on these goods and services at the production point increases the cost of supply. An increase in the supply cost shifts the supply curve upwards towards the left. This leads to a reduction in supply and an increase in supply.

Price Sut Taxes Et 0 Qt Qe Quantity

In the above graph,

D is the demand curve; S is the supply curve before tax and S+t is the supply curve post the imposition of excise tax. E is the equilibrium with Qe and Pe is the equilibrium quantity and price respectively. Et is the post-tax equilibrium with Qt and Pt as post-tax equilibrium price and quantity.