What is Excise Tax?

Excise tax describes a tax on the revenue of an individual unit of a an excellent or serviceProducts and ServicesA product is a tangible item the is placed on the industry for acquisition, attention, or intake while a service is one intangible item, which arises from. The vast bulk of tax revenue in the United claims is generated from excise taxes.

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Excise taxes room generally applied to exactly the an unfavorable externalitiesNegative ExternalitiesNegative externalities occur when the product and/or intake of a good or business exerts a an unfavorable effect top top a 3rd party independent created by the consumption of a unit the the great or service. Because that example, there are excise taxes levied versus gasoline and cigarettes.


Excise tax describes a tax on the revenue of an separation, personal, instance unit the a good or service. The vast bulk of taxation revenue in the United claims is created from excise taxes.The incidence of an excise tax counts on the price elasticity of demand and also the price elasticity the supply.Deadweight loss is a expense to culture or deficiency led to by market inefficiency (inefficient use of resources).

How Excise tax Affects the Quantity and Price of products or Services


Assuming that great A is a homogenous good, in the absence of taxation, the equilibrium price is P0, and the equilibrium quantity is Q0. If the federal government decides to impose one excise taxation of $X, the owner of good A will just supply the amount demanded in ~ a price of P1 + $X.

After taxation, it deserve to be observed that the amount demand transforms from Q0 come Q1, together the equilibrium moves from B come A. It suggests that the application of taxation will lead to a diminish in quantity demanded. Excise taxes lead to either consumers paying an ext or producer receiving less.

Excise Tax imposed on Consumers


If excise tax is enforced on consumers, the consumer’s demand for an excellent A will certainly decrease. The is depicted as the demand curve move from place D0 to D1. Amount shifts indigenous Q0 come Q1 after ~ the excise tax has actually been implemented on consumers of every unit of great A.

The difference between P2 and P1 is the quantity of excise tax that is imposed. That is also the quantity the demand curve move from D0 to D1.

Excise Tax imposed on Producers


If excise tax is implemented on the producer, the supplier will carry out less quantity of an excellent A. That is shown as the it is provided curve move from S0 come S1. Quantity shifts from Q0 come Q1 ~ the excise tax is enforced on the manufacturing of great A.

The difference between P2 and also P1 is the amount of excise tax that is imposed. That is also the quantity the it is provided curve move from S0 come S1. The area fallout’s under the need curve and above the it is provided curve in between Q1 and Q0 is taken into consideration the deadweight lossDeadweight LossDeadweight loss refers to the lose of financial efficiency as soon as the optimal level the supply and also demand are not achieved. In various other words, the is that tax. The is a ns of surplus.

What is the Incidence that Excise Tax?

The incidence of excise tax is the measure of just how much that the tax the producer and consumer room responsible for. The is crucial to keep in mind that it regularly does not matter who officially pays the tax, together the equilibrium outcome is the same.

Incidence of excise taxation generally falls unevenly between consumers and also producers, as one group bears much more of the taxation burden than the other. The primary aspect in the incidence of excise taxes is the price elasticityPrice ElasticityPrice Elasticity measures exactly how the quantity demanded or supplied of a good changes as soon as its price changes. Learn much more in this resource by CFI. That supply and also the price elasticity the demand.

Excise taxation Paid greatly by Consumers


If a demand curve is reasonably steep, the demand is price inelastic. If the supply curve is relatively flat, the supply is price elastic. When demand happens to it is in price inelastic and also supply is price elastic, the majority of the taxation burden falls upon the consumer.

In the graph above, the complete tax payment by the producer and also the customer is same to P0 – P2. The taxation paid by the consumer is calculated as P0 – P1. The taxation paid by the producer is calculated as P1 – P2.

The an ext inelastic consumer demand is, the much less the quantity demanded through the consumer alters as price increases – this is why castle absorb the majority of the taxes burden in such a scenario.

Excise tax Paid greatly by Producers


If a need curve is fairly flat, the need is stated to it is in price elastic. It method that the amount demanded is extremely sensitive to transforms in price.

The fairly steep it is provided curve shows that supply is price inelastic. It means that the producers most likely incur high shutdown expenses to avoid operations, and that quantity provided is not really sensitive to price.

See more: Administrative Disch Ar 635-200 Para 5-17, What You Should Know About Chapter 5, Ar 635

In the graph above, the total tax paid is same to P1 – P2. The taxes paid by producers is equal to P0 – P2.

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