Taxation

Taxation (Basics) The effect of the tax, graphically, is that of a straight line that cuts the supply and demand curves at a smaller equilibrium quantity. The gray shading is the Deadweight loss caused by the amount not produced and consumed. Shaded in green represents tax revenue, value taken from consumer and producer surplus.	Taxation With Elastic Supply In this case, the supplier can more easily enter and exit the market relative to the consumer (eg. Trade, consulting services). Thus, the consumer pays more tax, proportionately.	Taxation With Elastic Demand In this case, the consumer is very easily replace the product or stop buying (eg restaurants, jewelry, soft drinks). Thus, the one who pays more tax, proportionally, is the producer.	Taxation With Inelastic Supply In this case, the supplier fins it difficult to enter and exit the market (eg, planes, tolls), in proportion to the consumer. Thus, the one who pays the most tax is the producer. Note that the tax revenue generated in a market with inelastic suppliers is higher than in a market with elastic suppliers.	Taxation With Inelastic Demand In this case, the consumer finds it difficult to stop consuming (eg, cigarettes, gasoline, medicines). Thus, the person who pays the most tax is the consumer. Note that the tax revenue generated in a market with inelastic demand is greater than in a market with elastic demand.

S = Supply Curve

To see the effects of contracting or expanding supply and demand, go to Supply and Demand (Perfect Competition) ;

For more elasticity graphs see the Budget Constraint and Elasticity page