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Different Impacts of Taxation

Find two articles that discuss the local, state, or federal taxation of a good. Describe the effects of taxation and price controls on the economy.

-Is the tax levied on the producers or consumers?
-How does the tax affect supply or demand?
-How does the tax affect the equilibrium price and quantity?
-In this market, describe a hypothetical situation where a price ceiling or floor could be imposed. What implications would this have for the market?

Solution Preview

The effect of taxation and price controls on the economy range from the curtailment of the supply of goods to an increase in costs. When there is a tax impose on goods like tobacco or cigarette as described in the two articles, there is an increase in the price of the product, this shifts the supply curve of the product to the left, in other words less quantity is available at the same prices, there is a decline in the quantity demanded and a new equilibrium between demand and supply is reached. On the other hands when price 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 to fulfill that demand and so a shortage remain. There are stock outs. So in case of imposition of taxes as has been done in case of cigarettes, there is excess production capacity 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 the consumers. This is the reason why the proposed tax of $1 will increase the price of a cigarette pack by $1. For ...

Solution Summary

This solution discusses two articles that discuss local, state, or federal taxation of a good. It then explores the different effects of taxation.

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