Question

Explain and illustrate how excise taxes, ad valorem taxes, price floors, and price ceilings impact the functioning of a market. Try these problems: 2, 18

Short answer

The excise taxes raise prices, which reduce demand for the goods on which they are imposed. The ad valorem taxes also raise prices while lowering demand.

The price floor has a negative impact on demand, while the price ceiling has a positive impact on demand in the economy. The government sets a price ceiling to keep the price level of goods and services in the economy under control.

Step-by-step solution

Impacts on the function of a market:

Excise Tax: An excise tax is an indirect tax that is imposed on the supplier or producer, who then incorporates it in the price of the product. Excise taxes raise prices, which reduce demand for the goods on which they are imposed. Ad valorem taxes also raise prices while lowering demand.

Ad Valorem Tax: This is a tax levied on the value of a transaction, such as property tax. The government sets a price floor to keep the price level of products and services in the economy under control. It has the ability to prevent the price from falling below a specified level. When the government controls the price level or imposes a tax, it has an impact on demand and supply.

Price floor and price ceiling

The price floor has a negative impact on demand. The price ceiling has a positive impact on demand in the economy. The government sets a price ceiling to keep the price level of goods and services in the economy under control.