Tax Implementation and Market New Equilibrium - An Alternative Method

Abstract

In an equilibrium, quantity demanded equals quantity supplied at a particular price for the product. When the tax is imposed by the government in the market, it is obvious that the tax imposed has an impact on the equilibrium and tends to establish a new equilibrium with changes in price and quantity. This explanation provides a basis of how the slopes of the simple (straight linear) demand and supply curves can be used to determine the new equilibrium price, in particular. Simple linear equations of the demand and supply curves are the limitation of this paper. Demand and supply are the two forces that determine equilibrium of price and quantity for a product in a market. In an equilibrium, quantity demanded equals quantity supplied at a particular price for the product. When the tax is imposed by the government in the market, it is obvious that the tax imposed has an impact on the equilibrium and tends to establish a new equilibrium with changes in price and quantity. It is understood that the total tax per unit of product cannot be the total increase in price of the product, since the market operation makes the supplier to pass only a certain proportion of the unit tax imposed. As the tax affects supply, the supply curve tends to shift upward, thus establishing the new equilibrium with the same demand curve. Therefore, the new price has to be established for the new supply curve equation and the new supply equation is equalized to demand equation to determine new equilibrium price. This explanation provides how the slopes of the simple (straight linear) demand and supply curves can be used to determine the new equilibrium price, in particular. To understand the simplicity of determining the tax-based new equilibrium, it is important to know how the formal application takes place for the same as currently available. 2. Formal Determination of the tax-based new Equilibrium Price Consider that a market demand and supply equations for a product are