Effects of Taxes on Elasticity of Products and Services

Name Institutional Affiliation Course Code/Title Instructor Date Elasticity Introduction Elasticity is defined as the measure of one variable’s reaction to the change in a different variable. In economics, elasticity is the degree in which individuals; consumers or producers change their demand for certain products or services or the amount supplied due to changes in price or income. Tariffs are the taxes charged to a class of imports or exports. Tariffs are used by a country to impose more charges on foreign goods hence making them more expensive which translates to them being unattractive to the citizens of that country. The aim of imposing tariffs is to promote local products over the imports. The effect of a tariff imposed depends on the elasticity of the demand or supply of the goods and services. Goods and services are considered to be elastic if minor changes in their prices lead to very high changes in the demand or supply (Johnson, 36). Conversely, goods and services are considered to be inelastic if changes in the price lead to slight or no changes in the demand or supply levels. When goods and services are taxed, the cost of bringing them to the market increase and this could lead to an increase in the market prices. However, this depends on tax incidence. This refers to the person who feels the tax burden. For example, when a tax is imposed on raw material, a supplier may decide to shift the burden to the manufacturer by increasing the cost of the raw material. After manufacturing of the finished goods, the manufacturer may decide to shift the burden placed upon him to the consumer by increasing the price of the finished goods (Johnson, 62). Effects of Taxes on Elasticity of Products and Services The effects of taxes on products and services are entirely contingent on the elasticity of demand for the said goods and services. If the demand for a particular product or service is elastic, then even the slightest changes in the prices will lead to changes in the demand for the product (Johnson, 173). When taxes are imposed on a certain product, this means that the price of the product will go up due to shifting of the tax burden by the manufacturer. Therefore, when the prices escalate, and the demand is elastic, ...