Application # 1. An Excise or Per Unit Tax:
A fixed amount of tax on each unit of production of a commodity is called an excise or per unit
tax. It is an indirect tax charged on goods such as alcohol, tobacco and fuel. It is indirectly paid
to the government as the tax is included in the product’s price. There are two types of excise tax,
ad valorem and specific tax. Ad valorem tax is a tax imposed at a fixed rate on goods and
services. Specific tax is the fixed amount of tax levied on specific type of goods which have
social costs. For example, cigarettes and alcohol have social costs. The impact of such taxes is on
the buyers and sellers. The sellers would shift the burden of the tax on to the buyers, so that, at
the equilibrium quantity, demand price can be determined. The demand price of buyers=the
supply price of the sellers +the tax, the demand price-supply price=tax or the supply
price=demand price- tax.
These all three will have three ways shown in figure 1.17 which shows the impact of per unit tax
on market equilibrium. The DD represents demand curve and SS shows the supply curve of the
good. P0 is the equilibrium price while q0 is the equilibrium quantity before tax intersected at
point E showing the equilibrium point.
In case of demand price-supply price=tax, has been shown in part a of figure 1.18 in which
demand and supply price is determined through demand and supply curves. The new equilibrium
q1 after tax will be the difference between DD and SS would be equal to t.
At pint q=q1 the price with the tax the buyers will have to pay is p15 and sellers would get price p2
after deducting the tax at q=q1. At p1 buyers demand quantity q1 and at p2 sellers supply quantity
p1 which show equilibrium and buyers and sellers would not change the situation.
The impact of excise tax on market equilibrium is demand price=supply price+ tax after the
imposition of tax. In figure 1.18b, at any q the demand price would be determined through DD
and the supply curve would be obtained by a S1S1 parallel to the SS curve. The new equilibrium
