Taxes can really change how people spend their money in a market economy. Here are some key ways they do this:
Changing Prices: When the government adds taxes to products, it makes them more expensive. For instance, in the UK, there is a tax called VAT (Value Added Tax) that is 20% on many items. Because of this higher price, people might buy less or look for cheaper options.
Changes in Demand: When taxes go up on certain items, like tobacco or sugary drinks, people tend to buy less of them. For example, after a new tax on sugary drinks was introduced in the UK in 2018, sales of those drinks dropped by 2.4%.
Income Effect: Taxes can lower the amount of money people have left to spend. If someone’s income goes down by $100 because of taxes, they might start buying fewer things that aren’t necessary.
Substitution Effect: Because of taxes, people might switch from buying more expensive taxed items to cheaper ones. This change can significantly affect what people are buying in the market.
Taxes can really change how people spend their money in a market economy. Here are some key ways they do this:
Changing Prices: When the government adds taxes to products, it makes them more expensive. For instance, in the UK, there is a tax called VAT (Value Added Tax) that is 20% on many items. Because of this higher price, people might buy less or look for cheaper options.
Changes in Demand: When taxes go up on certain items, like tobacco or sugary drinks, people tend to buy less of them. For example, after a new tax on sugary drinks was introduced in the UK in 2018, sales of those drinks dropped by 2.4%.
Income Effect: Taxes can lower the amount of money people have left to spend. If someone’s income goes down by $100 because of taxes, they might start buying fewer things that aren’t necessary.
Substitution Effect: Because of taxes, people might switch from buying more expensive taxed items to cheaper ones. This change can significantly affect what people are buying in the market.