As their vehicles. However if there was a rise

 

 

As a conclusion, the question was answered
and illustrated by diagrams, with examples to show the affect price
elasticities of demand and supply has on indirect tax.

 

 

The establishment of a sugar tax in
Mexico has been initiated due to the over usage of sugars which has resulted in
people gaining obesity and type 2 diabetes. As a result of the introduction of
the tax the soft drinks increased by 10% which was one of the major factors why
there was a decrease of quantity consumed by an estimated 10.6%. Moreover, a
price rise in fizzy drinks is now related with a greater amount of expenditure
of water, including sugar, snacks and milk. Additionally, there’s
now been a decline in the consumption of traditional snacks and sweets. The tax
made an impact, as there was an increase in price, which affected the demand
for the soft beverages, which was consciously meant for this outcome. (Colchero,
2015)

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The government put more emphasis on
indirect tax with commodities such as oil and cigarettes as the demand is
inelastic because the tax causes only a small fall for the amount of
expenditure. Moreover, the aftermath will make the taxes being greater for the
government. (Anon., 2017)

 

(Anon., 2017)

The price elasticity of demand: when
there is a rise in price for goods, the quantity demanded will fall. However we
will want to know just how much demand will fall as not all products will react
the same. For example if there is a rise in the price of oil there may be a
slight fall in demand as some people may resort to riding bicycles or
ultimately making fewer journeys, but nevertheless it will make a little
difference on how people use their vehicles. However if there was a rise in
prices for cauliflowers it would take a major fall in demand, reason being is
that there many alternative vegetables for consumers to resort to as people are
conscious of their prices with vegetables and will ultimately buy whatever is
reasonably priced. (Sloman, 2003, p. 44)

 

 

 

 

(Anon., 2017)

 

 

 

 

 

 

 

 

 

 

 

 

However the burden can also be shared
off. For example if the government decided to put a £1 tax on a packet of
cigarettes, the incidence will now be on the consumer. However the market may
be highly competitive and the local market may have many sellers so it can
result in the retailer fearing its loss in sales, which could force the
retailer to increase the prices by 50p and pay the 50p charge to the government
themselves. In this dilemma this would result in both the consumers and the
firms taking a shared burden as the smoker would be worse off as they have to
pay an increase of 20p and the seller will have to pay 10p out of their total
revenues to compensate the government. (Anon., 2017)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The consumer pays more of the tax by
ultimately paying more for the product and the burden falls on them when they
are unresponsive as well as the price elastic demand being inelastic. However
in a price elastic demand it would be vice-versa as the burden will now fall on
the suppliers if the consumers are responsive to the price rise and they would
now have to pay for the majority of the tax. (Anon., 2017)

 

There are three different types of
indirect tax, firstly there is customs tax which consists of imported and
exported products. In addition these taxes are determined by cities and states
that house seaports. The second tax is excise tax which are placed mostly on
raw materials and they are paid for by the manufacturers at the beginning
stages. However the tax is carried on to the consumer and this creates another
layer of indirect taxes the average consumer has to pay. The final indirect tax
is gas tax which is ultimately paid for by the consumers whenever they by fuel
for their vehicles. Gas taxes are buried in price per gallon and they also
include state taxes as well as federal taxes. (Johnson, 2017)

 

(Graham, 2017)

The formula for price elasticity of
demand:

 

Price
elasticity of demand is a measurement of the relationship between a change in
the amount of quantity that’s demanded in terms of a particular product or
service, as well as its changes in price. Supply is the amount of something and
its availability for usage (Anon., 2017). Indirect tax is
paid to the government and it is levied by goods and services rather than
consumers incomes. Price elasticity of supply is not only measured by how much
quantity is demanded, but also how the quantity is supplied. As a result we
will want to know how responsive the quantity supplied is to a change in price.
The measure we would use to asses this is price elasticity of supply. (Sloman, 2003, p. 53) (Anon., 2017)

 

1.     
To
introduce the question it will be answered with definitions, with the use of diagrams,
examples to illustrate how price elasticities of demand, and supply has an
effect on indirect tax.