As a conclusion, the question was answeredand illustrated by diagrams, with examples to show the affect priceelasticities of demand and supply has on indirect tax. The establishment of a sugar tax inMexico has been initiated due to the over usage of sugars which has resulted inpeople gaining obesity and type 2 diabetes. As a result of the introduction ofthe tax the soft drinks increased by 10% which was one of the major factors whythere was a decrease of quantity consumed by an estimated 10.
6%. Moreover, aprice rise in fizzy drinks is now related with a greater amount of expenditureof water, including sugar, snacks and milk. Additionally, there’snow been a decline in the consumption of traditional snacks and sweets. The taxmade an impact, as there was an increase in price, which affected the demandfor the soft beverages, which was consciously meant for this outcome. (Colchero, 2015) The government put more emphasis onindirect tax with commodities such as oil and cigarettes as the demand isinelastic because the tax causes only a small fall for the amount ofexpenditure.
Moreover, the aftermath will make the taxes being greater for thegovernment. (Anon., 2017) (Anon.
, 2017)The price elasticity of demand: whenthere is a rise in price for goods, the quantity demanded will fall. However wewill want to know just how much demand will fall as not all products will reactthe same. For example if there is a rise in the price of oil there may be aslight fall in demand as some people may resort to riding bicycles orultimately making fewer journeys, but nevertheless it will make a littledifference on how people use their vehicles. However if there was a rise inprices for cauliflowers it would take a major fall in demand, reason being isthat there many alternative vegetables for consumers to resort to as people areconscious of their prices with vegetables and will ultimately buy whatever isreasonably priced. (Sloman, 2003, p. 44) (Anon., 2017) However the burden can also be sharedoff. For example if the government decided to put a £1 tax on a packet ofcigarettes, the incidence will now be on the consumer.
However the market maybe highly competitive and the local market may have many sellers so it canresult in the retailer fearing its loss in sales, which could force theretailer to increase the prices by 50p and pay the 50p charge to the governmentthemselves. In this dilemma this would result in both the consumers and thefirms taking a shared burden as the smoker would be worse off as they have topay an increase of 20p and the seller will have to pay 10p out of their totalrevenues to compensate the government. (Anon., 2017) The consumer pays more of the tax byultimately paying more for the product and the burden falls on them when theyare unresponsive as well as the price elastic demand being inelastic. Howeverin a price elastic demand it would be vice-versa as the burden will now fall onthe suppliers if the consumers are responsive to the price rise and they wouldnow have to pay for the majority of the tax. (Anon., 2017) There are three different types ofindirect tax, firstly there is customs tax which consists of imported andexported products. In addition these taxes are determined by cities and statesthat house seaports.
The second tax is excise tax which are placed mostly onraw materials and they are paid for by the manufacturers at the beginningstages. However the tax is carried on to the consumer and this creates anotherlayer of indirect taxes the average consumer has to pay. The final indirect taxis gas tax which is ultimately paid for by the consumers whenever they by fuelfor their vehicles. Gas taxes are buried in price per gallon and they alsoinclude state taxes as well as federal taxes. (Johnson, 2017) (Graham, 2017)The formula for price elasticity ofdemand: Priceelasticity of demand is a measurement of the relationship between a change inthe amount of quantity that’s demanded in terms of a particular product orservice, as well as its changes in price. Supply is the amount of something andits availability for usage (Anon., 2017). Indirect tax ispaid to the government and it is levied by goods and services rather thanconsumers incomes.
Price elasticity of supply is not only measured by how muchquantity is demanded, but also how the quantity is supplied. As a result wewill want to know how responsive the quantity supplied is to a change in price.The measure we would use to asses this is price elasticity of supply. (Sloman, 2003, p. 53) (Anon., 2017) 1.
Tointroduce the question it will be answered with definitions, with the use of diagrams,examples to illustrate how price elasticities of demand, and supply has aneffect on indirect tax.