Course

Taxes

Instructor: Alex Tabarrok, George Mason University

Taxes : Compulsory contribution to government revenue from individuals and firms. A tax is equivalent to an increase in a firm's costs. This is from the video “ The

Taxes: Compulsory contribution to government revenue from individuals and firms. A tax is equivalent to an increase in a firm's costs. This is from the video “The Supply Curve Shifts” in the Principles of Microeconomics course.

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Transcript

Let's look at a tax. A tax on output is equivalent to an increase in costs, and therefore a tax will decrease supply. Here we go.


Suppose that before the tax, firms were willing to sell, let's say, 60 million barrels of oil per day at a price of $40 per barrel. Now we imagine there's $10 tax. How much will firms require in order to sell 60 million barrels of oil per day now that there is a $10 tax? What would be the requirement for that? $50. In fact, what a tax does, is it shifts the supply curve up by the amount of the tax. In this case, by $10 everywhere along the supply curve.


By the way, notice we actually haven't said anything here about what the effect of the tax will be on prices. In fact, we haven't said anything at all about how prices are determined. That's going to be in an upcoming video on equilibrium.

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