Effect of taxes (say sales tax) imposed on seller (or even buyer) is that the supply curve shifts upward, i.e., it reduces. Why would any imposition of tax reduce the supply? I understand that because the sales tax is imposed on seller (or even buyer), it ultimately has to be paid by buyer. it is an indirect tax. So, demand might come down. Because in Kaplan, even when the tax was imposed on buyers, the supply came down. Why would a seller reduce supply? And I also saw that the tax was shared between buyer & seller. Why?
If the government imposes a sales tax on sellers, it effectively increases the sellers’ costs by the amount of the sales tax; thus, either the supplier will charge a higher price for a given quantity, or will produce a smaller quantity for a given price.
The tax is not ultimately paid by the buyer. The buyer and the seller will each pay a portion of the tax; who pays what portion is a function of the price elasticity of supply and the price elasticity of demand. A higher price elasticity of supply will result in less of the tax being paid by the seller, and more being paid by the buyer; a lower price elasticity of supply: more tax paid by the seller, less by the buyer. A higher price elasticity of demand will result in less of the tax being paid by the buyer, and more being paid by the seller; a lower price elasticity of demand: more tax paid by the buyer, less by the seller
Demand – that is, the demand curve – doesn’t change. What changes is the quantity demanded, which is a movement along the (existing) demand curve.
If the tax is imposed on the buyers, it effectively increases the price to the buyer, and everything above happens on the other side:
- Buyers will pay a higher price for the same quantity, or demand a smaller quantity for the same price
- The tax will be shared by the buyer and the seller, each paying a portion; who pays what portion depends on the price elasticities of supply and demand
- Supply – that is, the supply curve – doesnt change. What changes is the quantity supplies, which is a movement along the (existing) supply curve