Effect of taxes and subsidies on price
Taxes and subsidies change the price of goods and, as a result, the quantity consumed. There is a difference between an Ad valorem tax and a specific tax or subsidy in the way how it is applied on the price of the good. The final effect stays similar though. In the end levying a tax moves the market to a new equilibrium where the price of a good paid by buyers increases and the price received by sellers decreases. The incidence of a tax does not depend on whether the buyers or sellers are taxed. Most of the burden of a tax falls on the less elastic side of the market because of the lower ability to respond to the tax by changing the quantity sold or bought. Introduction of a subsidy, on the other hand, lowers the price of production which encourages firms to produce more. Such a policy is beneficial both to sellers and buyers, who can buy the good for lower price.
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