How does tax and price affects the goods?

          Based on the article I have reviewed from The Edge newspaper on the 1^st of October 2012,titled “Another Breather year for ‘sin’ sectors” that stated Budget 2013 did not increase the “sin”  taxes which results in enjoyment and cheering news for the brewing,gaming and tobacco industries.In other words,the demand in consuming products and services such as alcohols,tobacco and gambling will somehow remain the same and suppliers are willing to supply more. Other than that,the government is trying to overcome the illegal cigarettes issue and also alcoholism.In this article,we could relate to the economic efficiency,government price setting and also taxes has been imposed.Other than that,elasticity of demand also relates this.Tobacco’s like cigarettes,alcohol beverages and gambling are all inelastic good.Inelastic good can be define as an economic term where supply and demand are not affected when price changes.Hence,people would still commit to buy cigarettes,alcoholic drinks and continue to gamble but sometimes these type goods can be inferior goods depending on the situation.There are factors that contributes to price elasticity of demand such as the number of close substitutes for a good,the cost of switching product or goods and whether it is a habitual consumption.An inelastic demand is also explain when the percentage change in quantity demanded is less than the percentage in price ,therefore the price elasticity is less than 1 in absolute value.

       As we all know,in competitive market,the price adjusts to ensure that the quantity demanded equals the quantity supplied.In other words,consumers  are willing to pay the willing to supply the products according to the market price.However,consumers  succeed in causing the government to impose a price ceiling and price floors.

      Price ceiling is a legally determined maximum price that sellers may charge where as price floor is a legally determined minimum price sellers may receive in order to control the market.Government also imposes tax in order to help to control or improve the abused used of tobacco’s,alcohols and gambling.Other than that,government also relies on revenues earned to finance its operations.Economist through our the world had developed the concepts of consumer surplus,producer surplus, and economic surplus to analyse the effects of price ceiling,price floors and taxes.

    Consumer surplus determines the dollar benefit consumers from buying goods or service in a market.It is also the difference between the higher price a consumer is willing to pay and the price consumer actually pays.In this case,we could apply it  to the alcohol,tobacco and gambling where whenever there is increase in price there would not be a change on the quantity demanded which results in marginal benefit.Marginal benefit is the additional benefits towards the consumers from producing the goods.In this case is slightly different consumers are willing to pay where they will receive the satisfaction of having or consuming the goods as stated before as the marginal benefit.

           Next,is the Producer Surplus.Producer surplus can be define as measuring the net benefit received by producers from participating in a market.The net benefit we potray here is the difference between the lowest price a firm would be willing to accept for a good or services and the price it actually receives.For example,the producers are willing to supply tobaccos,alcohols and services like gambling at a lower price when demand is in high.Economic efficiency can be based on two terms which are marginal benefit and marginal cost where this two equal each other that is when economic efficiency has been achieved in selling these goods.

         The positive and normative of price ceilings and price floors are the the example of government control but too much government intervention has the ability to reduce the ability of the market system to produce similar increases in living standards in the future.This goes to the market of producing tobacco,alcohol and the services of gambling to not achieve market efficiency when there is high taxation due to the government intervention.

         The results of government intervention are winners,losers and inefficiency.The winners are for those who pay less for the goods and services under the control of price ceiling and price floors where by losers are those paying higher for those goods and services due to the black market.Black Market is a market in which buying and selling takes place at prices that violate government price regulations.For example,when the price is too high for the consumers to buy the goods and services that stated earlier,they opt or consider to enter the black market that the prices will be so lower and suit consumers ability to buy.

        How does taxes affect the prices for tobacco,alcohol and gambling?Whenever government impose taxes a good or services,less of that good or services will be produced and consumed.For an example,a tax on cigarettes will increase the cost of smoking and decrease the amount smoking that takes place same goes to alcohol and gambling.The tax on has increased the price paid by consumers but in this case it would not affect the quantity  demand that much because it is an inelastic good.The government will receive the tax revenue,some of the consumer surplus and producer surplus will become tax revenue for the government where as some will turn to deadweight loss.Eventhough sellers appear to receive higher price and consumer appears to pay more for the goods but there is a loss for consumer surplus due to the high taxation and there is also loss in producer surplus.This proves that tax on the goods and services stated before such as tobacco,alcohol and gambling has reduced both consumer surplus and producer surplus.In the question of who pays the tax,it is so obvious that whoever is legally required to send a tax payment to government.There is two difference of who bears the burden of the tax and who is legally required to pay tax and it is called tax incidence.

     As a conclusion,taxation is must depending on the situation of the market.In this situation,government are coming up with various ways in order to decrease the social effect and the bad habits of consuming products like tobacco’s,alcohol and also services such as gambling.The increase in price that relates to tax will not affect the demand for the goods and services that much as stated earlier  due to the satisfaction and wants of any individuals.


By Najwa binti Mohamed Mokhtar