Effects of Taxation on Economy - Essay Example

A tax on a commodity tends to be shifted from the producer forward to the consumer and from the consumer backward to the producer. A tax on production of a commodity tends to raise its price and will, therefore, be normally borne by the consumer. But a tax on consumption is likely to check consumption and tends to be shifted backward to the producer. The tax levied of consumers can reduce the demand. Commodity taxes are disincentive to purchase the commodities on which they are levied. The amount by which the tax reduces purchases will depend upon the elasticity of demand for that commodity.

The less elastic is the demand and the supply, the less will the demand be reduced. On the other hand the tax levied on corporations will impose a disincentive on a firm to incorporate. Taxes on firms can lead to low motivation for investment, which will in turn reduce the supply for goods if the Government has imposed price control with tax initiatives. A tax on income tends to reduce the ability to save and invest on the part of individuals. A tax on net profits of business firms will reduce their ability to save and invest.

A decrease in investment is bound to affect adversely the level of output. The equilibrium price and quantity will be changed according to the elasticity of demand of that good. . The equilibrium price and quantity will be changed according to the elasticity of demand of that good. The extent to which a commodity tax will actually be shifted will depend upon the nature of demand and supply curves. If demand is inelastic, as is the case with the necessaries of life the people must buy the commodity.

The producer will be in stronger position and almost the entire burden of the tax will be shifted on to the consumer. But in the case of elastic demand, the people will buy less. In that case the price will not rise by the full amount of the tax, and the tax will be partly borne by the producer (Dewett, 571-572).- In this market, describe a hypothetical situation where a price ceiling or floor could be imposed. What implications would this have for the market'Government actions may shift demand and supply curves as when changes in safety legislation shifts the supply curve.

Price controls are Government rules or laws that forbid the adjustment of prices to clear markets.Price controls undertaken in the market can be of two types.1. Price ceilings: In this case Government applies an upper limit for the sellers and they cannot charge more prices upper than that limit. Such a limit is usually imposed when the shortage of a commodity is expected to increase the price of a commodity. Although through charging high prices the rationing of the scarce commodities can be undertaken.

The solution to the problem of scarce supply of a commodity can be responded by an increased price but this is an unfair solution. For example high food prices can lead to considerable hardship among the poor. In the case of above market 2. Price floors: Governments impose a limit of minimum price of