Effects of Tax and Price Policies on Demand and Supply - Essay Example

Effects of Tax and Price Policies on Demand and Supply. Effects of Tax and Price Policies on Demand and Supply Ideally, high taxation rates increase the final pricing of products to end-users because producers always pass the cost to consumers. Chicken nuggets market in Rhombus is highly inelastic, which implies that only a significant change in prices influences demand levels. The current tax system maintains a balance between production of chicken nuggets and market price, a factor that drives demand high.

Since producers get incentives from fair taxation, they cap their prices relatively low to the consumers as well. Since the request for chicken nuggets is highly inelastic, it would take significant tax levy on sales to discourage customers from purchasing the products. In short, consumers will feel the burden of tax because the producer of chicken nuggets will have no otherwise but to pass taxation cost to end-users. Eventually, Charlize government would still bear the blame of increasing the cost of living through high taxation rates.

Moreover, increased in tax with significant margin will only slice off a demand small size because of the high inelasticity. Setting lower prices for Nugget chicken producers will chase away many suppliers because elastic of supply is relatively flexible. Law of demand and supply stipulates that demand rises as prices drop. Therefore, cupping lower price will cause a shortage for nugget chicken because a sizable number of suppliers will be out of the market as demand sores. I recommend that Charlie should not use either method in isolation.

For instance, applying high tax levy will destroy the brand image. Setting lower prices will chase away chicken nuggets manufactures, which leaves angry consumers and jobless population. Therefore, Charlize should use a multidisciplinary approach that balances averagely high tax and tax reduction that leaves small profit margin for producers. Additionally, she can introduce substitute goods to dilute demand for chicken nuggets. Reference Poterba, J. (2007). Tax policy and the economy. Cambridge, Mass.

: MIT Press.