S2= S1+tax
S1
P3
P2
Government
revenue
demand curve
P3
Q’ Q#
This is a basic ad valorem tax diagram . Due to the increase in the
excise tax , the supply curve shifts . The new supply curve becomes
steeper than the original supply curve . Let the pre tax equilibrium be
the quantity Q# and price P2 . When the government increased the
tax , the new supply curve S2 is equal to S1+tax . There is no change
in the demand curve since demand is not affected . Therefore there
is a new market equilibrium now where the price paid by the
consumers increases to P3 and quantity supplied decreases to Q’.
The amount of tax is shown by P3 – P1 . This goes to the
government. The producers receive the final price P3. Therefore . the
equilibrium quantity produced and consumed decreases ,
equilibrium price increases . Even though there is an increase in the
price , indivisual firms now face a fall in the price they receive and
quantity produced decreases , at times leading to underallocation of
resources . Consumers now have to pay more for the same quantity .
It is only the government who gains when there is an increase in a
tax .
It may not be a healthy idea when we say that government can
increase their revenue without raising taxes . It may not be possible .
Instead the consumers can switch to other alternatives and use
cycles for short distances and use public transport . These solutions
help prevent pollution too . Petrol and diesel are non renewable
fuels . We need to conserve them for our future generations . Also an
increase in the economy of the country will help overcome this
problem . We , the citizens of India can work together and increase
the economy of the country .