Budget Incidence of Tax- Report

   

Added on  2019-11-26

10 Pages1904 Words206 Views
Running Head: Budget Incidence of TaxBudget Incidence of Increase in Tax Resulting from a Need to Raise Government’s ExpenditureStudent NameInstitutional AffiliationCourse/NumberInstructor NameDue Date
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Budget Incidence of Tax2Budget Incidence of Increase in Tax Resulting from a Need to Raise Government’s ExpenditurePart aBudget incidence may originate from the changes in government’s expenditure and changes in taxes. Government expenditure may be on salaries to civil servants, transfer payment,purchase of goods and services, debt repayment and services and capital expenditure for development. Government spending and taxation takes place simultaneously. The taxes result in reduced earnings from the private sector and subsequently lowers the disposable income. The end result is that benefits derived from public goods will rise whereas that derived from the private sector will fall. This effect is considered the budget incidence of tax. A per unit tax is tax collected from every unit of output that a firm produces or sells. Irrespective of any kind of tax imposed, the market equilibrium between supply and demand gets disrupted. According to Hyman (2014), an increased tax level for a specific commodity increases the commodity’s price but reduces its demand; this depends on the price elasticity of demand for that product (Guru, 2016).
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Budget Incidence of Tax3Fig: Production in a competitive market in the short run Cost & Price(a)Industry Revenues(b)Single FirmMCSSSS1ATCP1PPSuper-normal Profit D=AR=MRDD1CDDQQ1QuantityQOutputThe industry price in fig (a) is determined by the intersection of demand and supply. Increase in demand to DD1 in the short run raise price to P1, profit rises, and thus attracts new entrants subsequently raising supply to SS1. In fig (b), the single firm is a price taker. The AR = MR for a single firm because all the units are sold at a uniform price. Thus the demand curve for an individual firm is the average revenue. The average total cost for a single firm in a perfect competitive market is lower than the MR in the short run and thus the firm is able to make an economic profit represented by the shaded area in fig (b). According to Waugh (2014), there is no entry of new firms in the short run. Profit is maximized at MR = MC and thus the output that maximizes profit is equal to Q and price is P. The total revenue is equal to PQ; and the cost is CQ. We have seen that the demand curve for the individual firm in a perfect competitive market
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