Let’s assume that the federal government imposes a special excise tax amounting to $1.00 per kilogram on pork and $0.50
Posted: Thu May 19, 2022 11:05 am
Let’s assume that the federal government imposes a special excise tax amounting to $1.00 per kilogram on pork and $0.50 per litre on gasoline. Figure 16.8 demonstrates that the effect of indirect taxes depends on the elasticity of demand for the good or service being taxed. In the case of the pork market, the new tax acts as a tax on production and may seriously affect the ability of some pork producers to stay in business. In the case of the gasoline market, the new tax acts as a tax on consumption and may affect both driving habits and the sale of more energy-efficient vehicles. Which of these two taxes is the Canadian government more likely to impose?
Anyone operating a motor vehicle today will quickly recognize that the excise taxes already imposed on gasoline account for one-third of the per-litre price paid by Canadian consumers at the pump. Governments prefer to impose these indirect taxes on goods such as tobacco, gasoline, and alcohol to generate steady revenue streams and to tax and regulate consumption. Some of the revenues generated from gasoline excise taxes can then be used by governments to build and maintain the infrastructure of roads and bridges needed by both individuals and industry.
As you think your way through this comparison table you will gain a more functional understanding of the impact of taxation on different markets.
APPLYING ECONOMIC THINKING
1. Why would an excise tax on pork be a much more dangerous economic decision for government than a tax on gasoline?
2. How might an excise tax on gasoline be used to help reduce carbon emissions?
FIGURE 16.8 Market comparison table for gasoline and pork Effect of a $0.50 Tax on the Gasoline Market Elasticity The demand for gasoline is relatively insensitive to of demand price changes because gasoline is an essential source of fuel for automobiles, with very few substitutes readily available Effect of a $1.00 Tax on the Pork Market The demand for pork is sensitive to price changes because pork is a non-essential source of protein, with substitutes such as beef fish, and poultry readily available Supply Supply $1.40 130 New price 1.20 buyers 110 pay 100 after 0.90 ta 0.80 0.70 Price (per litre) Amount of taste by 9 Price per kilogram New price $1.40 buyers pay 5.00 after Tax 4001 Amount of 3.00 received by govt New price Suppliers 2.00 receive (after 100 0.50 New price 0.50 suppliers 0.40 0.30 Demand receive after tax) 0.20 0.10 Demand 50 100 150 200 250 Quantity (thousands of litres) Required reduction in quantity transacted so that the difference between what buyers pay and what sellers receive is the exact amount of the tax collected by government Proportion of tax burden assumed by buyers/consumers (70% or $0.35) Proportion of tax burden assumed by suppliers/producers (30% or $0.15) 50 100 150 200 250 Quantity (thousands of kilogram) Required reduction in quantity transacted so that the difference between what buyers pay and what sellers receive is the exact amount of the tax collected by government Proportion of tax burden assumed by buyers/consumers (25% or 50.25) Proportion of tax burden assumed by suppliers/producers (75% or $0.75) Pre-tax market conditions The market is at equilibrium when 140 000 L of gasoline are being transacted at a price of 50.70/L The market is at equilibrium when 140 000 kg of pork are being transacted at a price of $3.50/kg Applying the new tax Effect of tax With the tax in place, the price that buyers actually with the tax in place, the price that buyers actually pay ($1.05) and the price that suppliers actually pay ($3.75) and the price that suppliers actually receive (50.55) must differ by the exact amount of receive ($2.75) must differ by the exact amount of the tax (50.50) to keep the market in balance. the tax ($1.00) to keep the market in balance. As a direct result of the tax, the price to consumers As a direct result of the tax, the price to consumers has increased by $0.35, and the quantity has increased by $0.25, and the quantity transacted and consumed has decreased by 30 000 transacted and consumed has decreased by 30 000 L. kg. Given the insensitivity of this commodity to Given the sensitivity of this commodity to changes changes in price, most of the tax burden (%) has in price, most of the tax burden (75%) has been been passed on to the buyers/consumers. assumed by the sellers. Tax burden
Anyone operating a motor vehicle today will quickly recognize that the excise taxes already imposed on gasoline account for one-third of the per-litre price paid by Canadian consumers at the pump. Governments prefer to impose these indirect taxes on goods such as tobacco, gasoline, and alcohol to generate steady revenue streams and to tax and regulate consumption. Some of the revenues generated from gasoline excise taxes can then be used by governments to build and maintain the infrastructure of roads and bridges needed by both individuals and industry.
As you think your way through this comparison table you will gain a more functional understanding of the impact of taxation on different markets.
APPLYING ECONOMIC THINKING
1. Why would an excise tax on pork be a much more dangerous economic decision for government than a tax on gasoline?
2. How might an excise tax on gasoline be used to help reduce carbon emissions?
FIGURE 16.8 Market comparison table for gasoline and pork Effect of a $0.50 Tax on the Gasoline Market Elasticity The demand for gasoline is relatively insensitive to of demand price changes because gasoline is an essential source of fuel for automobiles, with very few substitutes readily available Effect of a $1.00 Tax on the Pork Market The demand for pork is sensitive to price changes because pork is a non-essential source of protein, with substitutes such as beef fish, and poultry readily available Supply Supply $1.40 130 New price 1.20 buyers 110 pay 100 after 0.90 ta 0.80 0.70 Price (per litre) Amount of taste by 9 Price per kilogram New price $1.40 buyers pay 5.00 after Tax 4001 Amount of 3.00 received by govt New price Suppliers 2.00 receive (after 100 0.50 New price 0.50 suppliers 0.40 0.30 Demand receive after tax) 0.20 0.10 Demand 50 100 150 200 250 Quantity (thousands of litres) Required reduction in quantity transacted so that the difference between what buyers pay and what sellers receive is the exact amount of the tax collected by government Proportion of tax burden assumed by buyers/consumers (70% or $0.35) Proportion of tax burden assumed by suppliers/producers (30% or $0.15) 50 100 150 200 250 Quantity (thousands of kilogram) Required reduction in quantity transacted so that the difference between what buyers pay and what sellers receive is the exact amount of the tax collected by government Proportion of tax burden assumed by buyers/consumers (25% or 50.25) Proportion of tax burden assumed by suppliers/producers (75% or $0.75) Pre-tax market conditions The market is at equilibrium when 140 000 L of gasoline are being transacted at a price of 50.70/L The market is at equilibrium when 140 000 kg of pork are being transacted at a price of $3.50/kg Applying the new tax Effect of tax With the tax in place, the price that buyers actually with the tax in place, the price that buyers actually pay ($1.05) and the price that suppliers actually pay ($3.75) and the price that suppliers actually receive (50.55) must differ by the exact amount of receive ($2.75) must differ by the exact amount of the tax (50.50) to keep the market in balance. the tax ($1.00) to keep the market in balance. As a direct result of the tax, the price to consumers As a direct result of the tax, the price to consumers has increased by $0.35, and the quantity has increased by $0.25, and the quantity transacted and consumed has decreased by 30 000 transacted and consumed has decreased by 30 000 L. kg. Given the insensitivity of this commodity to Given the sensitivity of this commodity to changes changes in price, most of the tax burden (%) has in price, most of the tax burden (75%) has been been passed on to the buyers/consumers. assumed by the sellers. Tax burden