Price Elasticity and Taxation Essay

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PriceElasticity and Taxation Essay

Priceelasticity of demand indicates the connection between the cost ofgoods and the amount demanded by consumers. In other words, itmeasures the response after the price of a product change. Aproduct`s consumption is believed to be price elastic when analteration in the cost of a product or service results in a biggerpercentage variation in demand. Also, the demand is described asprice inelastic when a variation in price results to a smallerpercentage alteration in demand. Although the tax burden depends onthe price elasticity of demand and supply rather than on the sourceof revenue, the burden of tax can fall more on producers or consumersdepending on the circumstance. This paper seeks to compare therelatively inelastic demand with the inelastic demand as it describesthe difference between the collected government tax revenues and theeconomic burden of the tax.

Thesource of government revenue is taxes. Nonetheless, taxes reduce bothdemand and supply in the market since sellers obtain a lower pricefor their merchandise and buyers pay a higher price. The governmentrevenue collected from sales of goods or services is known as anexcise tax. The incidence of an excise is determined solely by theelasticity and not by the person officially paying the tax.Typically, tax burden falls on the producers and consumers of thetaxed product. It is important to examine the elasticity of demandto determine who bears the most tax burden. When the demand isinelastic, the consumers experience more tax burden than the sellers.The government is likely to raise their revenue on addictive goodssuch as alcohol and cigarette and luxury goods such as vehicles. When the tax revenue increases, the sellers, in turn, hike theirprices making the consumers to pay more. By increasing the cost ofgoods, the sellers transfer the tax burden to consumers. Thegovernment records an increase in their tax revenue when there is aninelastic demand. It is important to note that, doubling the excisetax on goods and services will not double the revenue collected sincean increase in tax leads to a decrease in the quantity of goods orservices consumed.

Onthe other hand, when the demand is elastic, the sellers` experiencemore tax burden than the consumers. When the demand is elastic, itmeans that the price affects the number of goods required. Anincrease in price will lead to a decrease in consumption. When thegovernment tax revenue increases, the sellers bear the most taxburden because they do not risk hiking the prices since the buyerswill reduce their consumption. To avoid the decrease in consumption,they make small profits and bear more tax revenue. Further on,government tax leads to an increase in the commodity price making thebuyers consume less. Conversely, the tax leads to a decrease in theamount the sellers get making them produce less.

Inconclusion, the burden of the tax is felt by both consumers andretailers. However, the burden mostly falls on the market side thatis not affected much by the change in prices the inelastic demand.Needless to say, the sellers also absorb some part of the tax, thoughnot as much as the consumers. The sellers absorb the tax by loweringtheir profits to make up for the increase in government tax revenue.The government collects more tax when the demand is inelasticbecause the government can increase the revenue and the consumerswill have no choice but to continue buying those goods even at anincreased price. Mostly, the addictive and luxury goods oftenexperience an increase in government revenue.