Taxes and Prices

Suppose there is an
auction for a pearl.  The person with the highest demand is willing to
pay $5000 the person with the next highest demand is willing to pay
$4999.  The winner must pay a tax of $1000 to the government.

the tax the two bidders bid until the price reaches $4000 at $4000
(note that $3999+$1000 tax= net of $4999) the low bidder drops out and
the high bidder wins.  Total price to the high bidder is $5000, $4000
to the seller and $1000 to the government.

Now with no tax a
price of $4000 leaves two bidders in the ring so the price must rise
higher.  In fact, the price must now rise to $5000 to get the second bidder
to drop out.  Final price to the high bidder is $5000 – the seller gets
$1000 more in revenues and the government gets nothing.

If one wants to challenge the gas-tax argument then to place to do so is to argue that a temporary reduction in the tax, leading to more profits for the oil companies, will stimulate supply enough to have a significant effect on reducing price.  Any other argument is incorrect.


Comments for this post are closed