The Laffer Effect in a Product's Market in the Case of a Specific Tax

Ahmet Ozcam ()
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Ahmet Ozcam: Faculty of Economics and Administrative Sciences, Yeditepe University 26 Agustos Yerleskesi, Kayisdagi cad, Inonu Mah. Membag sok. 34755 Kadikoy, Istanbul, TURKEY

Review of Economics & Finance, 2015, vol. 5, 85-99

Abstract: Traditionally, the Laffer effect has been discussed in context of macroeconomic endogenous growth models or in the situation of labor market whether a tax cut on wages would persuade people to work more and also increase income tax revenues of the government. In this paper, we are firstly interested in the Laffer effect in a single product¡¯s market rather than a general macroeconomic situation. Secondly, we provide a general formula mathematically in that particular commodity market for the optimal tax amount of the government in the case of a specific tax using non-linear demand and supply curves, which is the most possible extension. It turns out that the optimal tax amount depends on after-tax demand elasticity and not on before-tax elasticity as it is commonly assumed in the economics literature and also on after-tax demand price and on consumers¡¯ share of burden of tax. Some important novel concepts such as the proportional increase in equilibrium price relative to initial equilibrium price ... are defined and discussed. Finally, we believe that any government should consider the issues discussed in this paper before taking a fiscal step in a micro market!

JEL-codes: A C02 C65 (search for similar items in EconPapers)
Date: 2015
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