I am of the school of thought that consumers determine what is produced and in what quantity. Consumers determine the end price too by their demand for the product. So assuming that consumers determine prices for goods and services, why does a tax raise the end cost to consumers? How can businesses get away with “passing costs onto consumers” when consumers are the ones that ultimately determine price?
Prices are ratios that arise from “bargaining” between consumers and producers. Competition brings about a tendency toward an equilibrium level. As for passing on costs, I don’t know. Rothbard believed it is nonsensical to say one can pass on a tax to consumers, because otherwise the firms could’ve just increased their prices anyway, and thus he argues they’ll instead push down factor rewards, especially those of specific factors (usually land.) Murphy has brought up the counter-argument in the study guide for MES though that why couldn’t the firm just lower the factor’s return if this is so and earn higher profits? I haven’t quite worked out an answer to that.
-Jon
the price of the commodity for sale is determined by demand supply relationship. when a government lay a tax on a commodity. call it T.
when the tax is first levied, businesses cant raise prices (‘to forward the cost on to consumers’) any more than they could have before the tax was brought into force. reason is the consuemr effective demand hasnt changed, and neither has the supply.(commodities waiting on shelves). these commodities sell at the same old price initially P. but know a typical business thats a seller bears the cost. he only gets P-T for each unit he sells.
ramifications down the line are the business of supply ing the commodity is less profitable. investment and entrepeunership leak out from the tax hit industry. the effect of this is to reduce supply.
now with a reduced supply. the same effective demand as before must create an increase of the market price for the product. the price has been raised because of the product shoprtage the tax has caused.
You are correct that consumers determine what is produced and the final end prices of products. They also determine the quantity of what is produced, albeit indirectly (producers demand factors of production, and set the price of the factors, but these prices tend to be the MVP of the factors which is dependent on the value of the final product determined by final consumers).
If a particular good is being produced and pure profit is gained the producers will increase their purchase of factors in order to create more product. Demand for more factors increases costs. Supply of more product decreases final price. It is in this way that pure profits are reduced to 0 in the long run, and the “final” price is arrived at. If a producer is earning negative profit he will sell off factors which sets in motion the opposite tendencies in price.
So, to answer your question, if costs are “passed on to the consumer” there can only be two explanations: 1) It is occurring only in the short term i.e. the final price has not been arrived at yet, or 2) The increase in prices is due to the decreased supply of that particular good (costs increased, producers sold off “excess” factors, and now produce less product) i.e. demand for the good is inelastic in that particular price range, in which case the costs were really not passed on, they were pushed back.
Option 3: The government at any level has imposed some sort of tax, which should not be imposed purely on the producer or consumer, so it is shifted from the producer to the consumer, at least partly.
I think it would be more accurate to suggest that businesses pass costs to individuals, not necessarily “consumers.” Remember that a business is a fictional entity. A “business” is merely the place where allocation of goods and services occurs.
Business costs then, are paid for either by the consumer (higher prices) or shareholders (lower profits) or laborers (lower wages due to lower sales, etc.) or more likely, some combination of those three.