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Taxation and Price Control on the Economy Essay Sample

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Introduction of TOPIC


            It is the role of the government to provide health, education, and security services to its constituents to secure their welfare. In order to finance all of the said roles and programs of the government to the country, tax collection is one of the ways by which the government can generate funds and usually being imposed to producers in the market. Tax’s role in the economy is not only for income generation of the government but also as a tool for the stabilization of the economy through moderating various business entities, thus affecting the supply and demand of goods and services in the market. In this regard, this paper aims to identify which party tax is being levied between consumer and producers as well as its effects on the level of prices, demand, and supply in the economy.

Consumers versus Producers

            Theoretically speaking, tax is being imposed to the producers in the market. Like for instance, producers of cigarettes and liquors are being charged of sin tax since the said products are considered to be “socially unacceptable products”. Sin tax does not only discourage the production of socially unacceptable goods, such as cigarettes and liquors, it also generates more funds to the government and protects the interest of consumers in the market. The government cannot prohibit the selling of these socially unacceptable goods due to certain reason, yet, considering the harmful effects of the above mentioned products, what the government could least do is to discourage its extensive production through levying higher taxes to its producers (GMA News, 2007). But since cigarettes and liquors are addictive in nature, its producers will now have enough room to pass the sin tax that they incur from the government through raising the prices of their products in the market. In other words, at first, the tax is being levied on the producers, but once the producers pass the tax to the consumers through price increases, then, that is the only time when one can consider that tax is being levied on the consumers.

Impacts of Tax on Demand and Supply

            Since tax is being levied directly from the government to the producers, tax can therefore affect the operational costs of producers in the market. Producers of elastic goods in the market are forced to cut down their production level once the government increased its tax rate in order to maintain their profitability and protect their interests. Elastic goods are type of products or services which quantity demanded changes dramatically with a corresponding price cha

nge (Moffatt, 2008). Due to this characteristic of elastic goods, producers cannot pass the tax that

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they receive from the government since it will only result to the depreciation of consumer’s demand level in the market.

Products such as restaurant meals are considered to be elastic goods, and by the time its prices increase due to uplifting of government tax rate it is already the tendency of restaurant owners is to minimize the number of their meals or servings in order to cut their production costs since they cannot increase their prices for the reason that it will only trigger the deterioration of consumer demand on their products. On the other hand, the producers of inelastic goods such as cigarette, liquor and electricity have the privilege to pass either the entire tax or a portion of the tax that they receive from the government through increasing the prices of their product since quantity demanded of these types of goods does not change much with price change. Meaning, producers of inelastic goods can exploit the fact that consumers will still buy their product at any cost or price level. In other words the effect of tax on supply and demand of an economy depends on the type of product involved whether it is an elastic or inelastic type of good.

Effects of Tax on Equilibrium Price and Quantity

            As for the effects of government tax on equilibrium price and quantity, it results for the increase on the equilibrium price level especially if the type of tax implemented is a corporate tax [P*+tax = new equilibrium price]. Taxes are usually being added to the prices of goods in the market by producers. The resulting equilibrium price in the market already includes the original price level plus the tax from the government. Once the equilibrium tax has already increased, it creates enough pressure for the equilibrium quantity to decrease since consumers are now discouraged to buy expensive products due to budget constraints, cet. par. Like for instance, suppose the original price of a unit of Nike shoes in the market is $250. The government imposed a Value Added Tax equal to 5% tax rate to Nike for every unit of shoe that it will produce in the market. In order for Nike to protect its interest and profitability, its tendency is to pass the Value Added Tax to the consumers with an end price equal to $262.5. Since footwear are considered to be an elastic good, then the natural response of footwear consumers in the market after Nike pass the tax that they receive from the government is to find other footwear brand that is relatively cheaper than Nike.

Imposition of Floor Price or Price Ceiling

            Suppose a typhoon destroyed around 50% corn yield in the country and created shortage of supply of corn in the market. This shortage of supply of corn in the market would then put enough market pressure for the demand of corn consumers to rise robustly in the market thereby giving corn distributors enough reason to significantly raise the prices of their corn on their warehouses. In order for the federal government to protect the interest of consumers, what is usually being done is to impose a price ceiling to corn in the market to limit the price level that corn distributors can only charge to their customers. Only on severe instances when the government will implement price ceiling such as mentioned above since it provides high dead weight loss in the market as a whole.


             Tax, therefore, provides an avenue towards the government to control the supply and demand in its economy for the benefit of the majority. Taxes tends to increase the equilibrium price level, especially if the product concerned is an elastic good, since producers cannot pass the tax that they receive from the government to the consumers.


GMA News, (2007). Teves Orders Review of Sin Taxes, Retrieved June 17, 2008, from http://www.gmanews.tv/story/68224/Teves-orders-review-of-sin-taxes

Moffatt, M. (2008). Price Elasticity of Demand. Retrieved June 17, 2008, from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm

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