Question

What happens to consumer surplus when a tax is implemented in the market? Be sure to explain fully.

Answer 1

Consumer and Taxation are the two major focal point in deciding the fate and future of any Economy.

Consumer surplus is generally defined as difference between the actual price paid by consumer and the price he is willing to pay for given good or service.

Tax Law compliance, Tax Implantation and Tax revenue reflect the growth and development of any market. And at the time taxation pattern in the market also impacts the consumer’s purchasing power, consumer satisfaction and consumer Surplus, which are the factors driving the production, distribution and consumption in the market.

                                       

Consumer surplus and Taxation together majorly impact the market through change in following.

a.Demand and supply .

b.Fiscal and Monetary policy .

It is far from possible to predict the persistent trend of consumer surplus due to tax implementation but there can be possible three scenarios from the general understanding of impact of taxation On consumer surplus in market.

1.REDUCTION IN CONSUMER SURPLUS.

When a new tax is bought in market it not only impacts the economic sentiments but also social sentiments of   different market players. From Procurers to consumer. Impacting each knot in demand and supply thread. Majorly when cost of the product increases it generally leads to lower consumer surplus. Following can be reasons of reduction in consumer surplus.

a) increases in tax compliance cost leading to increased cost of production.

b) decrease in imports due to high Tariffs leading to lower supply of goods and services .

c) Price discrimination tactics for price setting .

d) Monopolies may increase the price so as to profit them from current market pressures .

2.INCRESE IN CONSUMER SURPLUS.

Generally when new tax regime replace old taxation patters , it on larger side always comes with ease of doing business. Makings compliance simple , absorbable tariffs and less dependent on government assistance.   Following can be reasons of increase in consumer surplus.

a) Lower / reduction in tax compliance , giving market players a upper hand in demand and supply management.

b) If tariffs are cut more open completion among domestic sand foreign player hence profiting consumer.

c) Simple taxation results in higher Tax revenue to government hence more strategic approaches towards progressive taxation resulting in lower burden on tax payers .

d) Savings in production cost may result in higher investments in technology of production hence giving better product and service to consumer .

3.NEUTRALITY IN CONSUMER SURPLUS.

Where the economies are advance with more stable government regimes the New or Replaced taxation mostly does not comes with high turbulence in market .Following can be reasons of neutrality in consumer surplus.

a) Demand are supply are predictable due to stable demography.

b) Stable political regimes hence uniformity in taxation patters .

c) More independent production lesser state interference.

d) Technological advancement leads to price management with quality assured.

Hence the Production , distribution, taxation, consumption and governments together influence consumer surplus.