Reflect on how businesses and consumers interact under the influence of taxation. Using ideas from Chapter 5 and Chapter 6:
Explain how taxes affect a business’s decisions about pricing and production. Give a real example of a good or service that might be affected by a new tax.
Connect the concept of consumer choice to taxation. How do taxes on certain goods change the choices consumers make? Refer to the ideas of utility and marginal utility in your explanation.
Apply these ideas to your own life: Think of a time when a tax or price increase made you choose differently as a consumer. What alternative did you choose instead? Did you feel that your total satisfaction (utility) increased or decreased? Why?
Pricing: When a tax is introduced or increased, businesses often try to pass some or all of the tax burden onto consumers by raising the product's price. The extent to which they can do this depends on the price elasticity of demand and supply. If demand is inelastic (consumers aren't very sensitive to price changes), the business can pass on more of the tax without losing many sales.
Production: The tax acts as an effective increase in the cost of production. To maximize profit, a business will typically reduce the quantity of the good or service it produces, shifting its supply curve (or effective supply curve, depending on the tax type) inward. The higher cost means fewer units can be profitably produced at any given market price.
Real Example: Gasoline (Fuel) Excise Tax
Imagine a new excise tax is placed on gasoline.
Business Impact: Gas station owners (retailers) and the oil companies (producers) face an increased cost per gallon. They will likely raise the pump price to cover the tax. This price increase, combined with the higher cost, will lead them to reduce the quantity of gasoline supplied to the market compared to the pre-tax level.
Sample Answer
Taxes significantly influence the interactions between businesses and consumers by affecting pricing, production, and consumer choice. Drawing on principles typically covered in microeconomics chapters discussing efficiency, market structure, and consumer behavior (like Chapters 5 and 6), here is an explanation.
💰 Taxes and Business Decisions
Taxes, whether imposed on producers (like an excise tax or a corporate income tax) or consumers (like a sales tax), affect a business's decisions regarding pricing and production because they alter the costs and potential profits.