Chapter 7, Problem 17AA

To determine

To evaluate: The changes that would be due to increase in taxes to the direction of supply curve.

Explanation of Solution

The tax makes the company less competitive at any price in a market because the supplies curve changes. Because the seller’s tax rises the making cost and selling the product, it reduces the amount supplied at any price. The supply curve moves to the left. Imposing a tax on a product would change the supply curve towards the left.

This results in a decrease in demand and a higher price. The effect of a tax however depends on demand elasticity. A higher tax can cause just a slight drop in demand if it is inelastic.

Economics Concept Introduction

Introduction: Higher tax rate reduces the incentive for savings; the wealthy people earn more than the poor that can lead to under investment. Lower investment is having a dampening impact on a country's economic development. Taxes as a whole, therefore, have a limiting impact on the ability to work, spend and savings.