Specific Tax: A Fixed Tax Per Unit of a Good or Service
1. How a Specific Tax Shifts the Supply Curve
Imagine you run a lemonade stand. It costs you $0.50 to make one cup, and you sell it for $1.00. Now the government says you must pay a specific tax of $0.20 per cup sold. To stay as profitable as before, you now need to charge $1.20 to cover your costs plus the tax. This tax acts like an increase in your production costs. In economics, we show this by shifting the supply curve upward (or leftward) by the exact amount of the tax. For every quantity, the price sellers need to receive increases by the tax amount.
2. Real-World Example: Gasoline Tax
Many countries impose a specific tax on gasoline, often several cents per liter or gallon. This is a classic example to understand the impact. Let's say the government adds a tax of $0.50 per gallon. The immediate effect is that the supply curve for gasoline shifts up by $0.50. This leads to a new equilibrium with a higher price for buyers and a lower price received by sellers (after paying the tax). The table below shows a hypothetical scenario before and after the tax.
| Scenario | Price Paid by Buyer ($) | Price Received by Seller ($) | Tax ($) | Quantity Sold (Gallons) |
|---|---|---|---|---|
| Before Tax | 3.00 | 3.00 | 0.00 | 1000 |
| After $0.50 Tax | 3.40 | 2.90 | 0.50 | 950 |
Notice the buyer pays $0.40 more, and the seller receives $0.10 less. This split shows tax incidence. Even though the tax is collected from sellers, both parties share the burden.
3. Important Questions About Specific Tax
A: It depends on the elasticity (responsiveness) of demand and supply. If demand for a product is very inelastic (like medicine), buyers will bear most of the tax because they will continue buying even at higher prices. If supply is very inelastic (like unique beachfront hotels), sellers will bear more of the tax. The tax incidence is shared between them.
A: A specific tax is a fixed dollar amount per unit (e.g., $1.00 per pack of cigarettes). A sales tax, often called an ad valorem tax, is a percentage of the price (e.g., 8% of the selling price). A specific tax shifts the supply curve in a parallel manner, while a percentage tax pivots it.
A: They are easy to administer and predict. For goods like cigarettes or alcohol (often called "sin taxes"), a high specific tax is used to discourage consumption and raise revenue. It also ensures the tax amount is clear to both businesses and the government, regardless of price fluctuations.
Conclusion: The Ripple Effect of a Per-Unit Tax
Footnote
- [1] Tax Wedge: The difference between the price paid by consumers and the price received by producers, which is equal to the amount of the tax.
- [2] Tax Incidence: The analysis of the effect of a particular tax on the distribution of economic welfare. It describes which group (consumers or producers) actually bears the burden of the tax.
- [3] Elasticity: A measure of how much the quantity demanded or supplied of a good responds to a change in price. Inelastic means quantity doesn't change much when price changes.
- [4] Ad Valorem Tax: A tax based on the assessed value of an item, such as real estate or personal property. In this context, it is a percentage-based tax (e.g., sales tax).