Free Research Paper About Effects Of A Tax

Article: http://openmarkets.cmegroup.com/7584/why-u-s-oil-markets-reflect-supply-demand
A tax can be defined as a wedge between the price buyers pay and the price sellers receive. Imposition of a tax can have adverse effects on both consumers and sellers (Rowlingson 46). A tax raises the price buyers buy and lowers the price sellers receive and reduces quantity bought and sold. The effect of a tax can be well illustrated by use of a demand and supply graph.

S
P a

P0--b------------

Pe -----------------c--------
P1 ------d---------
e D

Q0 Q1 Qe Q

Without a tax, the equilibrium price and quantity is Pe and Qe respectively. A tax is denoted by area C.
Consumer surplus =a
Producer surplus =e
Tax revenue=b+d
Total surplus= Consumer surplus + Producer surplus
= a+e+b+d

The tax caused total surplus to fall by c.

Q1 and Qe are not sold.
When a tax is imposed, there arises a deadweight loss. A deadweight loss tax is the fall in total surplus. This quantity is denoted by Q1 and Qe is not sold and this is because of the imposition of the tax. Imposition of taxes leads to a higher price and lower quantity demanded leading to reduced revenue by the sellers. The equilibrium price and quantity demanded changes. A tax distorts the market outcome because consumers buy less and producers sell less. The more the tax, the larger the deadweight loss and the less the revenue. The relationship between the size of tax and revenue can be explained by Laffer curve (Rowlingson 26).

The Laffer curve

Tax revenue
Tax size
The size of dead weight loss depends on the elasticity of demand and supply. Elasticity of supply and demand means the responsiveness of demand and supply due to a small change in price. Inelastic demand and supply leads to a small deadweight loss whereas there is a larger deadweight loss is observed when demand and supply is elastic. The government should tax the inelastic goods and services since it leads to a small deadweight loss.
When the oil production increases, the prices reduce and this changes the equilibrium price and quantity. This means that the consumer and producer surplus changes. When a tax is imposed, the deadweight loss increases (Haltom 35).
Price is the main determinant of market. A perfectly competitive market is a market where four main assumptions must be met. These assumptions are:

Many buyers and sellers- no single buyer or firm can influence the market

No barriers to entry and exit- The buyers and firms can enter and exit the market whenever it seems fit. There are no conditions of entry and exit.

Identical products-All products are exactly the same in terms of design, quality and guarantees.

Perfect knowledge- All firms and consumers know everything about the product, producers and consumers in terms of production costs, selling prices and features of the products.
All the four conditions must be fulfilled for a market to be a perfectly competitive market. When one of the assumptions is broken, it ceases to be a perfectly competitive market.

There are also four criteria that can be used to measure how competitive a market is. These are:

Consumer sovereignty - The producers can only produce what the consumers need and want.
People act rationally-All the firms and consumers will act rationally and consistently to maximize their welfare.
Property rights- This means that an individual or firm cam legally stop the use of a resource unless it is paid for.
No public good or externalities-All the benefits and costs are included in the price since goods and services are private goods.
Firms are price takers-Since all firms produce identical goods, firma are price takers. If a firm raises its price, they will not sell anything as consumers will buy from other firms. An imperfectly competitive market is a market dominated by one firm (Loiseau 10). Such firms are called monopolies. In such a market, the conditions of a perfectly competitive market are not satisfied. Imperfect competition firms may be monopoly (single seller), monopolistic (any sellers producing differentiated goods), oligopoly (few sellers), duopoly, monopsony (single buyer) and oligopsony (few buyers).
The labour market is influenced by demand and supply of labour. Wage rates are influenced by the supply of labour. High supply of lobar lead to low wage rate and low supply of labour lead to relatively high wages. The demand for labour is negatively sloped because of two reasons. First, a rise in wage increases the cost of production which forces them to raise their selling price. Hence, consumers will buy less and less output will be produced and this means that less labour will be used. The second reason is that a raise in wages makes labour more expensive relative to capital and firms will substitute capital for labour for whatever output that the firm decides to produce. Stick wages refers to a situation where workers earning do not adjust quickly to changes in labour market conditions. The major reason why we have unemployment is because of sticky prices. While some good’s prices seem to adjust daily, wage prices do not seem to change. Even at recession, wages do not seem to adjust, a phenomenon called downward wage rigidity. During inflation, stick prices seem to be corrected and hence equilibrium can be achieved. However, when inflation is low, the employers may be forced to cut the real wages. This phenomenon for sticky wages calls for policy to improve outcomes (Haltom 54).
Income inequality refers to a situation where there is a gap in the distribution of income especially between the rich and the poor. Statistics show that the gap continues to grow markedly. Income refers to any inflow of money ranging from the salary, interest, rent and other forms of inflows. The major reasons for increase in income inequality is because today jobs require more education than they once did. People with more education seem to get jobs where they are paid high wages and therefore the gap continues to grow between the rich and the poor. Income inequality is a public policy issue which can be perhaps dealt with by increasing the minimum wage. (Rawlinson 5) stated that income inequality cause health and social problems.
Poverty can be defined as an unreasonable low living standard that limits people from affording the primary necessities such as decent life, education, health and good drainage. It can also be defined as the depletion of any resource such as attitude, physical condition, economic scarcity and psychology (Haltom 49). Poverty can cause a lot of harm to the society and this calls for expertise and professionals who are capable of creating programs to fight poverty. The positive change can be brought about by analytical skills that allow practitioners to collect data, evaluate reports, and break through the complexity of issues that is the hallmark of public policy, developing, implementing and monitoring programs to serve the public. Some of the tools useful for practitioners and planners include critical thinking, use of methodologies such as qualitative, quantitative, political, and historical, economic, behavioural and cultural analyses. Practitioners and planners who aspire to affect change may specialize in areas that have direct impact on people, so as to act as a link to poverty (Loiseau 17).

Works cited

Haltom, R. (2013). Jargon Alert: Sticky prices. Econ Focus. First Quarter.
Loiseau, J.W. 2013 “Poverty” Correlation between Public Policy and Poverty. Walden University, Public Policy & Administration Department.
Rowlingson, K. (2011). Does income inequality cause health and social problems? Joseph Rowntree Foundation.