Question

What happens to the gains from trade when a tax is imposed? Choose an industry in which you work or with which you are familiar. How would a tax affect sales, supplier revenue, and consumer buying power in that industry?

Answer 1

When a tax is imposed on gains from trade, the incentive to work in that industry reduces as profits decrease.

In steel industry, imposition of tax increases the price of steel and makes it expensive. Sales also reduce as number of countries buying the steel will find it expensive and resort to other countries.

Supplier revenue reduces because of decrease in demand as steel becomes expensive and slowly industry prefers other alternatives which are cheap.

Consumer buying power also reduces in that industry cause if the tax is passed onto the consumer, they will have to pay more for the steel and will buy less in quantity.

Answer 2

When a tax is imposed, it increases the price of the taxed product, which leads to a decrease in the quantity demanded by consumers. As a result, the gains from trade decrease.

Let's consider the fast food industry as an example. Suppose a tax is imposed on fast food restaurants for each meal sold. This tax will increase the cost of producing and selling fast food meals. As a result, the price of fast food meals will increase. This increase in price will lead to a decrease in the quantity of fast food meals demanded by consumers.

As the quantity demanded decreases, fast food restaurants will experience a decline in sales revenue. The suppliers who provide the ingredients for fast food meals will also experience a decline in revenue since the fast food restaurants will purchase fewer ingredients to produce fewer meals.

Consumers will have to pay more for the fast food meals they buy, which means that their buying power will be reduced. As a result, they may choose to buy less fast food or switch to a different type of food altogether.

In summary, when a tax is imposed on an industry, it leads to a decrease in sales, revenue, and buying power. This results in a decrease in the gains from trade in the affected industry.