EFFECT OF TAXES & SUBSIDIES ON

MARKET BALANCE
BAB 3. EFFECT OF TAXES & SUBSIDIES ON MARKET BALANCE

by:
Prasetyo Hartanto, S.E.,M.M.
OUTLINE

Effect of Taxes & Subsidies on

market balance

Math for Business

EFFECT OF TAXES & SUBSIDIES ON
MARKET BALANCE

 The government imposes a sales tax on producers.

 The sales tax is expressed by the tax rate (t) = unit of money / unit of
goods.
 The effect of taxes on the price / quantity balance in the market can be
seen in the following table:

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 EFFECT OF TAX PER UNIT ON MARKET
EQUILIBRIUM
After Tax
Before Tax [tax rates(t)]

Demand
Function P = f (Qd) P = f (Qd)

Supply
Function P = f (Qs) P = f (Qs) + t

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 EXAMPLE :

In a company that a goods company has, demand function and supply function as follows :

D : P = 40 – 2Q dan S : P = Q – 5

Asked :

A. If tax is Rp. 3.00 per unit, determine the balance before and after tax

- Tax Rates and total taxes paid by consumers

- Tax Rates and total taxes paid by producers

- Total taxes received by the government

C. draw the graph

 ANSWER

a. Market Equilibrium
 Market Equilibrium before tax D = S

40 – 2Q = Q – 5
– 2Q– Q = – 5 – 40
– 3Q = – 45
Q = 15 → Qe = 15 S : P = Q – 5
P = 15 – 5
P = 10 → Pe = 10
 ANSWER

Market Equilibrium after tax

S’ : P + t → P = Q – 5 + 3
S’ : P = Q – 2
D = S’
40 – 2Q = Q – 2
– 2Q– Q = – 2 – 40
– 3Q = – 42
Q = 14 → Qe’ = 14 S’ : P = Q – 2
P = 14 – 2
P = 12 → Pe’ = 12
 CONCLUSION

The imposition of taxes from the government to producers turned out to have an impact :
The equilibrium price after tax is higher than the equilibrium price before tax : Pe’
= 12 → Pe = 10
The balance quantity after tax is lower than the balance quantity before tax : Qe’ = 14 → Qe = 15
 TAX RATES AND TOTAL TAX

 The tax rate imposed by the government on producers t = Rp 3 / unit.

 However, part of the tax is borne by consumers.
 The burden of the tax rate charged to consumers is felt by an increase in the equilibrium price of Pe = 10 then
Pe’ = 12.
 Then the amount of tax rates and total taxes for producers and consumers are as follows :
TAX RATES AND TOTAL TAX
C. GRAPH/CHART
40
35
30
25 S E
20 ’S
15
E
10
’
5 D
0
0 5 10 15 20 25
-5
EXAMPLE 2
FROM THE EXAMPLE BEFORE:

 Demand function D : P = 40 – 2Q and supply function S : P = Q – 5

 Ask :

A. If the government subsidizes these producers at a subsidy rate of IDR 1/unit of goods, determine the balance
before and after the subsidy
B. - Tariffs and total subsidies received by consumers
-Tariffs and total subsidies received by producers
-Total subsidies borne by the government
C. Draw a graph of the change due to the subsidy
 ANSWER

 A. Market equilibrium

Market equlibrium before subsidies D = S

40 – 2Q = Q – 5
– 2Q– Q = – 5 – 40
– 3Q = – 45
Q = 15 → Qe = 15 S : P = Q – 5
P = 15 – 5
P = 10 → Pe = 10
MARKET EQUILIBRIUM AFTER THERE IS A SUBSIDY
 The existence of subsidies from the government to producers turns out to be productive :

1. The price balance after the subsidy is lower than the price balance before the subsidy : Pe’ = 9,33 → Pe = 10

2. The balance quantity after there is a subsidy is higher than the balance quantity before the subsidy : Qe’ =
15,33 → Qe = 15
OUTLINE

THANK YOU!
An educated person has to be fair from the moment he thinks, especially in action

Math for Business