INFLUENCE OF TAX ON MARKET SUPPLY AND DEMAND

ABSTARCT

The think about of tax issues and its effect on the market cost, has continuously been one of the issues under discussion in estimating hypothesis. Taxes, other than covering consumptions included in the budget, have an important part in advertise control and disposal of defects. The tax approach when managing with market supply and demand, will continuously have many controversial results; in this manner, the essential address is almost the impact of commodity taxes on the supply and demand that are components of making the market cost and balance. This paper is a brief overview from impact of taxes on perfect and imperfect competition markets.

Keywords: Tax, Supply, demand, GDP, Market, price, perfect competitive market.

Demand and supply are the two strengths that determine balance of cost and amount for a product in a market. In an equilibrium, amount demanded equals quantity provided at a specific price for the product. When the tax is forced by the government within the market, it is apparent that the assess imposed has an affect on the equilibrium and tends to set up a new equilibrium with changes in price and quantity. It is understood that the total tax per unit of item cannot be the overall increase in price of the product, since the market operation makes the supplier to pass only a certain extent of the unit tax imposed.[1]

Figure 1. Effect of tax to the market equilibrium

As it is given in the graph below, by implementing a tax the supply curve shifts to the left, meaning that Supply is reducing with tax. However, an increase in tax leads to the fall in demand and higher price.

By impacting incentives, taxes can influence both supply and request variables. Decreasing marginal tax rates on wages and salaries, for example, can induce individuals to work more. Growing the earned wage tax credit can bring more low-skilled workers into the labor force. Lower marginal tax rates on the returns to assets (such as interest, profits, and capital gains) can encourage saving. Decreasing marginal tax rates on business income can cause a few companies to contribute locally instead of overseas. Tax breaks for investigate can empower the creation of modern ideas that spill over to help the broader economy. It is obvious that the tax collection first will have the most elevated impact on request curve, since at any level of the cost, the producer will have its supply sum to the market, and it is natural to say that the supply curve will not alter in this case and the buyer must at the same time pay the sum of the goods they are applying for and pay of assess it to the government. As a result, in this circumstance, the demand curve will move to the left and bottom. The reason of demand curve moving to the left is due to decrease of buyer inclination due to an increase in sales prices that will diminish its leaning to purchase. Subsequently, since of the increment in price from the starting equilibrium, the consumer only will be willing to return to its initial demand that market prices lower than the tax levied. It is evident that in spite of falling producer costs from P with tax to P without tax, the beginning balance level will decrease from Q without tax to Q with tax and due to lower consumer's demand, producer also has lower supply, in this manner by setting taxes, the volume of market exchanges decreases. It can hence be concluded that the determination of the assess, in spite of the lessening of the producer's starting price, the amount of seller's profit would be less than from the introductory equilibrium price, and the buyer paid only a smaller amount to the seller, thereby reduced the tax commitment each and both market curves moved, and in spite of the tax on consumption, it has also played role on the amount of the producer's supply, which in turn implies a factor in decreasing the tendency to produce and operate the enterprises in each industrial plant. So distant, the buyer (the market demand curve) has paid more and the producer (the market supply curve) has paid less than the trade between them for a specific product. [2]

Supply, Demand and Taxation in the Imperfect Competition Market

So distant, we have examined the impacts of tax estimating on the competitive showcase. But how is the tax effect on the monopolistic market? Maybe it can be contended that within the imperfect competition market, tax means could be a control for monopoly. For the most part, taxes on a monopoly firm can be discourse in four segments, setting up Fixed Charge, Unit Tax, Profit Tax, and Price Taxes. Within the fixed assess circumstance, all monopoly curves of TC(total cost) , TFC(total fixed cost), AFC(average fixed cost) and ATC(average total cost) have been moved upwards, but have not been changed within the amount of production, cost and consumer's surplus and will only decrease the firm's benefit. Subsequently, it can be expressed that any figure that causes the displacement of the MR(marginal revenue) and MC(marginal cost) curves, it can alter of production and price.

a                                                          b                                     c          

Figure 2. Effect of tax assessment to the market (а - Effect of A tax assessment on a monopoly firm , b - effect of tax when MC=ATC, c - effect of fixed tax on the amount of production and price )

As shown in Figure 2a, the tax assessment on a imposing business model firm has caused the exchange of the ATC curve move unparalleled to upward, but the circumstance is distinctive at the time of forcing charges on the monopoly unit. Within the over case, as appeared in Figure 2b, the ATC, MC bends are rise to to the charge rate per unit move upwards and driving to extend in cost and the uprooting of the MC bend to upwards and the generation is diminished. Subsequently, due to the transmission of the MC bend, the equilibrium cost and amount will moreover alter. Thus, in the pure monopoly market, the implementation of unit or price taxes leads to reduction in product, because the monopolist produces even less than the optimal amount even before taxation, as a result, assessment of taxation, the Output is further decreased and further away from the productive level and can lead to further company production. The result referred to above applies to taxes on units and rates, but the distance from the efficient level Output would be higher than the tax price and, as a consequence, further inefficiency in unit tax situations. [4]

Overall, The effect of the tax on the supply-demand equilibrium is to shift the quantity toward a point where the before-tax demand minus the before-tax supply is the amount of the tax. A tax increases the price a buyer pays by less than the tax. Similarly, the price the seller obtains falls, but by less than the tax. Taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium. Buyers and sellers share the burden of takes. In the new equilibrium, buyers pay more for the good and sellers receive less

References:

1. “TAX IMPLEMENTATION AND MARKET NEW EQUILIBRIUM”, Samithamby Senthilnathan. A Journal of Management.
2. Mankiw, N. G. (2014). Essentials of economics. Connecticut, CT: Cengage Learning, 155-165
3. Asia Development Bank. (2016). Asian Development Outlook 2016: Asia’s Potential Growth.
4. Stigler, G. J. (1952). The theory of price. New York, NY: The MacMillan Company.
5. “Evaluating the effects of a tax increase”, Karin Ericsson, Uppsala 2015