Note that the same analysis also works for comparative statics where we change the sales tax on only one class of goods.
A world where sales taxes are introduced on a single good (or class of goods) for which we are drawing the supply and demand curves.
We consider comparative statics between two situations:
Effect of quantity ceiling on economic surplusĮffect of sales tax on a single good with a competitive market.
Effect of price floor on economic surplus.
Effect of price ceiling on economic surplus.
However, their effects on economic surplus are often in the same direction as that of taxes: negative. Subsidies are taxes in negative, so their effects on market prices and quantity traded are the exact negatives of the effects of taxes.
Effect of sales tax on economic surplus builds on the analysis here to study how sales taxes affect the producer surplus and consumer surplus and how they result in a deadweight loss due to taxation.
Relationship with other analyses Other effects of sales tax Two complementary goods each sold in perfectly competitive markets Two partial substitute goods each sold in perfectly competitive markets Single good provided in a perfectly competitive market Summary of several cases Case in questionĬonclusion about pre-tax market price(s) (relative to market price in a world without the tax)Ĭonclusion about post-tax market price(s) (relative to market price in a world without the tax)Ĭonclusion about equilibrium quantity (or quantities) traded (relative to a world without the tax) This is to be compared to the equilibrium quantity traded in a world without sales tax. This is to be compared to the market price in a world without sales tax. This is obtained by adding the sales tax to the pre-tax market price.
The post-tax market price, i.e., the effective price that the buyer pays.
The pre-tax market price, i.e., the effective price that the seller gets to keep.
In a word with tax, we are interested in tracking three measures: In the world with no tax, there are two measures of interest: Hence, the law of one price is assumed to hold, so that we can talk of the market price.
For the most part, we assume competitive markets (though we also discuss other cases).
We assume away the costs of compliance with the tax laws, and do not deal with issues of tax evasion.
In particular, this means that we assume the law of demand and law of supply.
For the most part, we focus on short run effects.
Conversely, a decrease in, or elimination of, a sales tax should have the opposite effect. Much of this analysis can also be applied to increases in sales tax.
In this article, we largely focus on the effect of the introduction of a sales tax, by performing comparative statics between a world without sales tax and a world with sales tax.
However, the qualitative analysis largely does not. The quantitative analysis differs somewhat in both these cases.
A sales tax may be revenue-proportional (proportional to the price of the trade) or quantity-proportional (proportional to the quantity being traded).
Prior to beginning the analysis, we note the following:
7.2.2 Justification for conclusion about post-tax market price and quantity traded.
7.2.1 Justification for conclusion about pre-tax market price and quantity traded.
7.2 Sales tax on two mutually complementary goods.
7.1.2 Justification for conclusion about pre-tax market price and quantity traded.
7.1.1 Justification for conclusion about post-tax market price.
7.1 Sales tax on two mutually substitute goods.
7 Effect of sales tax that also affects complementary and substitute goods.
6.3.3 Completion of proof for revenue-proportional case.
6.3.2 Completion of proof for quantity-proportional case.
6.3.1 The explanation for why quantity traded must decrease and post-tax market price must increase under the introduction of a sales tax: setup.