Thursday, September 5, 2013

The effect of a tax - curve shifting

Vu asked:

Dear professor Arvani have a questionWhy when a unit tax is levied directly on consumers, this make the demand curve shifts downwards? and what could be the causes of this shift ?
Thank you very much

My response:

The tax is levied in some market for a good or service.  Typically, buyers pay some of it and sellers pay some of it as well.  The tax creates a wedge between what the buyer pays and what the seller receives, with the difference being the tax.  If in the diagram the price represented is the seller's price (so the supply curve remains the same) then the demand curve shifts down by the amount of the tax.  In this way if you add the tax to the seller's price, you get the price really does pay so the quantity demanded should be exactly what it was before at this higher price.

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