Taxation falls on consumers?

[Sage]

@mrwiizrd

I’m not an economist, but from my albeit limited experience in the business world I would say this is a classic example of where academic theory and real world application diverge. Most private firms have set profit margins that they effectively “mark up” to product costs. They don’t go out and survey demand at a multitude of prices. … In my experience firms aren’t out there actively monitoring aggregate demand in effort to establish an equilibrium price, most seek the lowest cost possible to maximize volume (i.e. wally world)

I’m not sure what you’re getting at here. All Rothbard is saying is that firms attempt to maximize profits, and hence their selling price tends to be where marginal cost equals marginal revenue. So if a tax is imposed, the firm cannot raise prices without losing revenue. Thus, taxes cannot be shifted forward.

Of course no one measures aggregate demand. Why would anyone do that?!

[Stranger]

@mrwiizrd

I’m not an economist, but from my albeit limited experience in the business world I would say this is a classic example of where academic theory and real world application diverge. Most private firms have set profit margins that they effectively “mark up” to product costs. They don’t go out and survey demand at a multitude of prices. For example, most retail stores are in the ballpark of the following benchmarks:

http://www.retailowner.com/Benchmarks50RetailSegments/tabid/55/Default.aspx

In my experience firms aren’t out there actively monitoring aggregate demand in effort to establish an equilibrium price, most seek the lowest cost possible to maximize volume (i.e. wally world)

It doesn’t matter how firms set their prices, ultimately they have to price things at the equilibrium between supply and demand. If as you say a firm marks up the cost of a good, then changes in consumer demand will cause them to slow down or speed up their reorders from their suppliers. These suppliers will either have to shut down production or expand production depending on these resupply orders, and if they shut down production then they the price of remaining supplies will rise.

So if a tax increases the price of a good 100%, either consumers will have to pay the 100% increase, in which case demand for the good will plummet and there will be an inventory surplus that will have to be run down, bankrupting the producers, or the final price to consumers will stay the same while marginal suppliers go out of business.

[liberty_student]

@Sage

But isn’t this view based on the cost theory of prices?

No. Practical real life experience.

I’m sorry, but I don’t have the attention span to deal with a wall of Rothbard quotes right now. If you can refine the argument specifically against what I have posted, then my interest level may be raised.

[Sage]

@Stranger

So if a tax increases the price of a good 100%, either consumers will have to pay the 100% increase, in which case demand for the good will plummet and there will be an inventory surplus that will have to be run down, bankrupting the producers, or the final price to consumers will stay the same while marginal suppliers go out of business.

Yes, that sounds right. And we wouldn’t call this shifting, because as Rothbard writes, “shifting implies that the tax is passed on with little or no trouble to the producer. If some producers must go out of business in order for the tax to be “shifted,” it is hardly shifting in the proper sense but should be placed in the category of other effects of taxation.”