TOPIC: EFFECT OF TAXES ON CONSUMER SURPLUS

SUBMITTED TO: SUBMITTED BY: KOMAL SONI

MR.DIGVIJAY SINGH KATOCH (BBA-LLB 1ST SEMESTER)

 ACKNOWLEDGEMENT

“Acknowledgement and recognition from authoritative quarters are

important to every artiste”

The success and final outcome of this assignment required

guidance and assistance from many people and I extremely
fortunate to have got this all along the completion of our
assignment work. I express my gratitude to my subject teacher
Mr.Digvijay singh katoch for giving me this opportunity to do
work on this topic and learn so much along the way. Ever
encouraging seniors helped me at every step of the research .
furthermore ,I would like to acknowledge staff of the himachal
pradesh national law university , who gave me the permission
to access to all the required equipment in completing this
project . this assignment could not have been completed
without each other’s help.
 CONTENTS
1. EXECUTIVE SUMMARY

2. INTRODUCTION

3. HISTORY OF TAXES IN INDIA

4. EFFECT OF TAXES

5. EFFECT OF TAXES ON SUPPLY

6. EFFECT OF TAXES ON DEMAND

7. EFFECT OF TAXES ON EQUILIBRIUM

8. REVENUE AND DEADWEIGHT LOSS

9. IMPACT OF GST ON INDIAN ECONOMY.

10. LITERATURE REVIEW

CONCLUSION
11.

12. BIBLIOGRAPHY
 EXECUTIVE SUMMARY
 Consumer surplus is basically the difference between the price consumer willing to pay
and the price which he actually pays.
 Imposing a tax on the supplier or the buyer has the same effect on prices and quantity.
 The effect of the tax on the supply-demand equilibrium is to shift the quantity toward a
point where the before-tax demand minus the before-tax supply is the amount of the tax.
 A tax increases the price a buyer pays by less than the tax. Similarly, the price the seller
obtains falls, but by less than the tax. The relative effect on buyers and sellers is known as
the incidence of the tax.
 There are two main economic effects of a tax: a fall in the quantity traded and a diversion
of revenue to the government.
 A tax causes consumer surplus and producer surplus (profit) to fall.. Some of those losses
are captured in the tax, but there is a loss captured by no party—the value of the units
that would have been exchanged were there no tax. These lost gains from trade are
known as a deadweight loss.
 The deadweight loss is the buyer’s values minus the seller’s costs of units that are not
economic to trade only because of a tax (or other interference in the market efficiency).
 The deadweight loss is important because it represents a loss to society much the same as
if resources were simply thrown away or lost.
 Small taxes have an almost zero deadweight loss per dollar of revenue raised, and the
overhead of taxation, as a percentage of the taxes raised, grows when the tax level is
increased.
INTRODUCTION:
The concept of consumers’ surplus is introduced by French engineer, Arsene Julis. Dupuit in
1844. After that it is propounded by Alfred Marshall and Prof J.R. Hicks. According to Marshall
there are several low price goods ‘These goods are used in our daily consumption. Such goods are
indispensible in our day today life. Consumer cannot deal his day without the consumption of
the goods e.g. Tea, Coffee, Tobaco, News paper etc. According to Marshall in the event of non
availability of goods consumer is ready to pay much higher price than what he pays daily. He
cannot remain without consumption of such goods. It shows consumer gets more satisfaction
than what he pays in normal times. It means he gets surplus satisfaction. It is over and above
that he makes the payment for it. Because any rational consumer will pay the maximum price
for any commodity which is exactly equal to the satisfaction derived from that commodity.
Generally try to pay the price any commodity which is less than the satisfaction derived from it.
He rarely pays the price which is greater than the satisfaction derived from it.

Consumer Surplus is the difference between the price that consumers pay and the price that
they are willing to pay. On a supply and demand curve, it is the area between the equilibrium
price and the demand curve.

For example, if you would pay 76p for a cup of tea, but can buy it for 50p – your consumer
surplus is 26p.
Extended Consumer Surplus Formula:

 Qd = Quantity demanded at equilibrium, where demand and supply is equal

 ΔP = Pmax – Pd
 Pmax = Price the buyer is willing to pay
 Pd = Price at equilibrium, where demand and supply are equal

HISTORY OF TAXES IN INDIA:

In 1860 , Tax was introduced for the first time by Sir James Wilson. India’s First “Union Budget”
Introduced by Pre-independence finance minister, James Wilson on 7 April, 1860. The Indian
Income Tax Act of 1860 was enforced to meet the losses sustained by the government on
account of the military mutiny of 1857. Tax is a mandatory liability for every citizen of the
country. There are two types of tax in india i.e. direct and indirect. Taxation in India is rooted
from the period of Manu Smriti and Arthasastra. Present Indian tax system is based on this
ancient tax system which was based on the theory of maximum social welfare.

"It was only for the good of his subjects that he collected taxes from them, just as the Sun
draws moisture from the Earth to give it back a thousand fold" .

EFFECT OF TAXES:
The tax could either be imposed on the buyer or the supplier. It is imposed on the buyer if the
buyer pays a price for the good and then also pays the tax on top of that. Similarly, if the tax is
imposed on the seller, the price charged to the buyer includes the tax. In the United States,
sales taxes are generally imposed on the buyer—the stated price does not include the tax—
while in Canada, the sales tax is generally imposed on the seller. An important insight of supply
and demand theory is that it doesn’t matter—to anyone—whether the tax is imposed on the
supplier or the buyer. The reason is that ultimately the buyer cares only about the total price
paid, which is the amount the supplier gets plus the tax; and the supplier cares only about the
net to the supplier, which is the total amount the buyer pays minus the tax. Thus, with a a 40-
cent tax, a price of Rs.100 to the buyer is a price of rs.60 to the seller. Whether the buyer pays
rs.60 to the seller and an additional 40 cents in tax, or pays rs.40 , produces the same outcome
to both the buyer and the seller. Similarly, from the seller’s perspective, whether the seller
charges rs.60 and then pays 40 cents to the government, or charges rs. 60 and pays no tax,
leads to the same profit. Another example is ,a government sales tax of $1 was levied on any
sale of the product, the price of the product would be $8, or $7 plus $1 tax. For the buyer who
was willing to pay $10, his consumer surplus falls to $2. For the supplier who was willing to
receive $5, the increased price would not bring him any extra surplus, because the $1 would be
paid out in tax. Other times, sellers can experience a lower producer surplus if they cannot pass
on the whole tax expense to the consumer and have to bear some or all of the tax burden.

First, consider a tax imposed on the seller.

EFFECT OF TAXES ON SUPPLY:

 At a given price p, and tax t, each seller obtains p – t, and thus supplies the amount associated
with this net price. Taking the before-tax supply to be SBefore, the after-tax supply is shifted up
by the amount of the tax. This is the amount that covers the marginal value of the last unit, plus
providing for the tax. Another way of saying this is that, at any lower price, the sellers would
reduce the number of units offered.

EFFECTS OF TAX ON DEMAND:

In this case, the buyer pays the price of the good, p, plus the tax, t. This reduces the willingness
to pay for any given unit by the amount of the tax, thus shifting down the demand curve by the
amount of the tax.

EFFECT OF TAX ON EQUILIBRIUM:

The quantity traded before a tax was imposed was qB*. When the tax is imposed, the price that
the buyer pays must exceed the price that the seller receives, by the amount equal to the tax.
This pins down a unique quantity, denoted by qA*. The price the buyer pays is denoted by pD*
and the seller receives that amount minus the tax, which is noted as pS*.

the price the buyer pays rises, but generally by less than the tax. Similarly, the price that the
seller obtains falls, but by less than the tax. These changes are known as the incidence of the
tax—a tax mostly borne by buyers, in the form of higher prices, or by sellers, in the form of
lower prices net of taxation.

REVENUE AND DEADWEIGHT LOSS:

The revenue is just the amount of the tax times the quantity traded, which is the area of the
shaded rectangle. The tax raised, of course, uses the after-tax quantity qA* because this is the
quantity traded once the tax is imposed. In addition, a tax reduces the quantity traded, thereby
reducing some of the gains from trade. Consumer surplus falls because the price to the buyer
rises, and producer surplus (profit) falls because the price to the seller falls. The difference,
shaded in black in the figure, is the lost gains from trade of units that aren’t traded because of
the tax. These lost gains from trade are known as a deadweight loss. The deadweight loss is
important because it represents a loss to society much the same as if resources were simply
thrown away or lost. The deadweight loss is value that people don’t enjoy, and in this sense can
be viewed as an opportunity cost of taxation; that is, to collect taxes, we have to take money
away from people, but obtaining a dollar in tax revenue actually costs society more than a
dollar.
 How will GST impact the Indian Economy?

GST the biggest tax reform in India founded on the notion of “one nation, one market, one tax”
is finally here. The moment that the Indian government was waiting for a decade has finally
arrived. The single biggest indirect tax regime has kicked into force, dismantling all the inter-
state barriers with respect to trade. The GST rollout, with a single stroke, has converted India
into a unified market of 1.3 billion citizens. Fundamentally, the $2.4-trillion economy is
attempting to transform itself by doing away with the internal tariff barriers and subsuming
central, state and local taxes into a unified GST. From the viewpoint of the consumer, they
would now have pay more tax for most of the goods and services they consume. The majority
of everyday consumables now draw the same or a slightly higher rate of tax. Furthermore, the
GST implementation has a cost of compliance attached to it. It seems that this cost of
compliance will be prohibitive and high for the small scale manufacturers and traders, who
have also protested against the same. They may end up pricing their goods at higher rates .

 Reduces tax burden on producers and fosters growth through more production. The current
taxation structure , pumped with myriad tax clauses, prevents manufacturers from
producing to their optimum capacity and retards growth. GST will take care of this problem
by providing tax credit to the manufacturers.
 Different tax barriers, such as check posts and toll plazas, lead to wastage of unpreserved
items being transported. This penalty transforms into major costs due to higher needs of
buffer stock and warehousing costs. A single taxation system will eliminate this roadblock.
 There will be more transparency in the system as the customers will know exactly how much
taxes they are being charged and on what base.
 GST will add to the government revenues by extending the tax base.
 GST will provide credit for the taxes paid by producers in the goods or services chain. This is
expected to encourage producers to buy raw material from different registered dealers and
is hoped to bring in more vendors and suppliers under the purview of taxation.
 GST will remove the custom duties applicable on exports. The nation’s competitiveness in
foreign markets will increase on account of lower costs of transaction.
A Brighter Economy

The introduction of the Goods and Services Tax will be a very noteworthy step in the field of
indirect tax reforms in India. By merging a large number of Central and State taxes into a single
tax, GST is expected to significantly ease double taxation and make taxation overall easy for the
industries. For the end customer, the most beneficial will be in terms of reduction in the overall
tax burden on goods and services. Introduction of GST will also make Indian products
competitive in the domestic and international markets. Last but not least, the GST, because of
its transparent character, will be easier to administer. Once implemented, the proposed
taxation system holds great promise in terms of sustaining growth for the Indian economy.
LITERATURE REVIEW:
1. WHAT HAPPENS TO A CONSUMER ‘S AND PRODUCER’S SURPLUS
WHEN GOOD IS TAXED
By: Nicole Long

Economic analysis provides the basis for examining the impact various policies have on both
consumers and producers. In economics, consumer surplus refers to the net gain that a
customer receives when she purchases a specific good at a specific price. One factor that can
influence consumer surplus is the implementation of an excise tax. With the imposition of an
excise tax, the overall price paid for a good will naturally increase. At a higher price level,
demand for the good drops, resulting in a reduction in consumer surplus.

Producer surplus represents the benefit the seller gains from selling a good at a specific price.
Government benefits from the imposition of an excise tax through the collection of tax
revenues. These revenues can be used to fund federal, state or local initiatives and programs.
On the other hand, excise taxes generally cause what is considered a dead-weight loss to
society. Dead-weight loss refers to the number of units not sold because of the excise tax.

2. How Can Taxes on a Good Affect Both Consumer Surplus

& Producer Surplus?
By: Victor Rogers
Consumer surplus and producer surplus figures are derived from demand and supply curve
analysis. The demand curve shows how many quantities of a product consumers are willing to
purchase at different price levels. The supply curve tells the different prices and quantities at
which suppliers are willing to deliver a product to the market. The introduction of taxes into
this dynamic affects how buyers and suppliers participate in the market for that commodity.

With the introduction of a tax, the consumer and producer surplus could both fall. The size of
dead-weight loss depends on various forces, one of which is how sensitive buyers or sellers are
to changes in price caused by a tax. This is known as the price elasticity of demand or supply. If
buyers are very sensitive to price changes, a tax burden can greatly increase the dead-weight
loss, as more consumers may exit the market. If, on the other hand, consumers consider the
product a necessity, a tax burden may not deter them. The same goes for producers: If
resources can be easily transferred to make other nontaxable products or products that
generate lower taxes, the supplier may exit the market for the higher-cost product, creating a
dead-weight loss to society.
 3. Consumer demand is very good. GST itself is creating
demand: By Adi Godrej
Goods and services tax has gone off to a very good start. And growth prospects are very good.
GST will always be work in progress. Even if you look at our old tax system, at least once a year
we have the budget which changes the rates…So new rates will always keep coming…The
government has done a very good job. GST by itself is complex. They did a very good job of
implementing it. Consumer demand is very good. GST itself is creating demand. There are other
factors also — the economy is doing well and overall, we are back to normal. In our case, rural
growth has been very good and Godrej Agrovet is one company where the demand is only rural
and it has also done well.
Government revenues in July have been very good, more than one twelfth of their budget….
Government revenues will rise and consumers will benefit. Penetration will increase. One of the
problems in Indian economy.. ..
 CONCLUSION
Consumer surplus is an economic measurement to calculate the
benefit (i.e. surplus) of what consumers are willing to pay for a good or
service versus its market price. The consumer surplus formula is based
on an economic theory of marginal utility. The theory explains that
spending behavior varies with the preferences of individuals. Since
different people are willing to spend differently on a given good or
service, a surplus is created. It is used across a wide range of corporate
finance careers . One factor that can influence consumer surplus is the
implementation of an excise tax. With the imposition of an excise tax,
the overall price paid for a good will naturally increase. At a higher
price level, demand for the good drops, resulting in a reduction in
consumer surplus.
 BIBLIOGRAPHY
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good-taxed.html
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