Simple Economics on the Web
Your handy guide to economics
Tax imposed on Consumers
Who pays when a tax is imposed on a product - the consumer or the producer? This web page and the next two web pages help to answer that question.
Begin by recognizing that the legal description of the tax does not mean much. The diagram below shows the effect of a sales tax of, say, $.50 per unit. Like all sales taxes, this tax is added on at the cash register and so represents a tax that consumers are supposed to pay.
The effect of the tax is to create two demand curves. The first - the original demand curve - represents the price the consumer pays which now includes the $.50 per unit tax. This demand curve still determines how many units consumers will buy. The second demand curve represents the price that producers receive - in this case, $.50 less than the price that consumers pay. This second demand curve now determines what suppliers will produce.
Use the orange button to experiment with different levels of the tax.
Questions: What happens to the price consumers pay? What happens to the price producers receive? How do you explain the fact that the price to consumers does not rise by the full amount of the sales tax?