Effect of Taxation

Essay by lissette0708 February 2009

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The effects of taxation and price control on the economy range from thecurtailment of the supply of goods to the increase of costs. When there is a tax impose ongoods like tobacco or cigarette as described in the two articles, there is an increase in theprice of the product, this shifts the supply curve of the product to the left, in other wordsless quantity is available at the same prices, there is a decline in the quantity demandedand a new equilibrium between demand and supply is reached. On the other hands whenprice controls are imposed there is an artificial decline in the prices.

At the lower prices, a higher quantity is demanded but the production is insufficient tofulfill that demand and so a shortage remain. There are stock outs. So in case ofimposition of taxes as has been done in case of cigarettes, there is excess productioncapacity and the factors of production have to be diverted to other industries or sectors.

Alternately, the production can be exported.

The intended effect is that the incidence of smoking gets reduced. The tax is levied on theconsumers. This is the reason why the proposed tax of $1 will increase the price of acigarette pack by $1. For administrative reasons the tax may be collected from theproducers, however, this tax is clearly on the consumers.

The tax will affect the demand for cigarettes. It has been shown through several empiricalstudies that imposition of taxes leads to a decrease in smoking. Those states that haveimposed taxes have witnessed lower levels of smoking and those states that have notimposed steep taxes have witnessed lower levels of reduction in smoking.

As smoking becomes more expensive, the number of cigarettes smoked falls. There is nodirect effect on the supply, however, when the demand for cigarettes fall the supply...