Question

Taxes are a part of a civil society, but they have a significant effect on supply and demand for goods. A tax is an extra cost added to an exchange. What is the effect of tax on a markets equilibrium point?^{​​​​​​​}

Answer 1

The tax shifts the supply curve leftwards or inwards by the amount of the tax . This shift in supply curve or reduction of supply is because of increase in production cost after tax . The tax is partly borne by sellers and partly by buyers . The amount of incidence on both parties depends on the elasticities of supply and demand curve .

The tax increases the amount paid by buyers and decreases the amount received by sellers . The difference between these two amounts is the tax . The tax incidence moves the market away from equilibrium and causes market distortion . So a dead weight loss is created after tax is levied . Both consumer and producer surplus declines , so total welfare declines .