Demand, Supply and Taxes
Introduction of taxes interferes with the correct working of price mechanism. The least that taxes do is to introduce restrictions that have an impact on the entire economy. Producers lose, consumers lose, and the entire economy suffers. Producers lose by having their producer surplus reduced. Producer surplus refers to the positive value given by the difference between the minimum price that sellers are willing to sell and what they actually receive. With taxes, the total price that sellers receive is reduced. In aIDition, quantity that producers are able to sell also gets reduced because tax leads to a rise in price, which ultimately pushes some buyers out of the market. Consumers, on their part, are affected by taxes in that their consumer surplus is reduced. This surplus refers to the positive price difference between the reservation price and the market price. The entire economy, on the other hand, loses some value due to taxation. The loss is referred to as deadweight loss[1].
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