We will use excise taxes to examine the impact of taxation on market behavior. Even though excise taxes are only one type of tax, they are the simplest type, and the effect of excise taxes is such that our analysis will yield valuable insights into the effects of all sorts of taxes.
Taxes can have powerful impacts on market behavior. Taxes can create a variety of unintended consequences. By this we mean that the incentives created by taxes and other policies can often create outcomes very different from those intended by the authors of the policy.
Tax Incidence: The party who is legally responsible for a tax payment, isn't necessarily the party who bears the economic burden of the tax. For example, if taxes on some product are increased part of the tax may be passed along to consumers in the form of higher prices. Much of this section will be devoted to the analysis of tax incidence or tax burden.
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