Taxation Versus Supply And Demand Elasticity

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In inelastic good market, change in price does not cause any change in the consumption, for elastic goods changes in prices trigger great changes in the consumption patterns.

An imposition of exercise tax by the government increases the levels of prices for the target good. The change in the quantity supplied and demanded depends on the elasticity on the both sides of supply and demand. For goods whose both supply and demand elasticity are elastic, little revenue can be gained since the buyer and consumers can alter their expenditures and supplies on the goods whose price has been increased by the taxes.

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In a case where the demand is inelastic and supply elastic only suppliers have a choice of changing their expenditure patterns and thus the tax imposition lies its burden heavily on consumers and not the producers. The producers can alter the level of production (supply level) to suit the market equilibrium. Consumers have no choice since they are addicted to the products thus little or no change in the consumption pattern once the tax is imposed. In this case a tax imposition or an increase in the rate of exercise tax will yield higher revenue compared to a case of elastic goods though the tax burden is heavily laid on the consumers.

A case where both supply and demand are inelastic reaps of higher amount of revenue to the government once a tax is imposed. In this case tax burden is equally laid on producers and consumers for no one have an option to its choices on either production patterns or consumption patterns.

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