No general conclusion can be given as to the extent to which taxes are shifted when they are placed upon goods which are produced under competitive conditions. Ordinarily the tax will be shifted to some extent, but in the process the price of the commodity may be changed by an amount less than the tax, greater than the tax, or by an amount just equal to the tax. The price will change according to the different conditions of cost of production - increasing, decreasing, or constant. The effect of a tax on goods which are produced under conditions of increasing cost can be most easily seen by the use of a diagram.
GRAPH No. IV
Suppose the market conditions are such that each unit of O E goods is selling at the price of O P - that is, just enough to cover the cost to the marginal producer. A tax is placed upon each unit of goods produced, which increases the cost per unit by the amount of the tax, Cc. This will make it unprofitable for the marginal producer to remain in the field, and fewer goods will be produced. At the new cost the demand will warrant the production of only O B units. As fewer goods are produced, however, the marginal cost becomes less, and the new marginal producer can sell at a price increased by an amount less than the tax, and still cover his cost of production. The new price per unit will be OP', an increase over the former price of P P' or B' b. The tax was C c or B' b', so the increase in the price was less than the tax by bb'.
Decreasing and Constant Cost. - In a similar way diagrams could be drawn to show the effect of a tax placed upon goods produced under conditions of decreasing and constant costs. In case the tax is levied upon goods produced under conditions of decreasing costs, the price will increase, but by an amount greater than the tax. The producer will have to recoup himself for the tax, and in addition make up for the greater cost per unit as fewer goods are produced.
In the case of goods produced under constant costs, since the cost of each unit is the same no matter how many are produced, the final result of a tax will be to increase the price by the amount of the tax. If competition has not worked itself out until the selling price is equal to the cost of production, then a tax may make no change in price. The producer may pay the tax out of the differential above costs, and leave production as before. Here the tax is not shifted, and the consumer is the gainer.
Ideas of justice and expediency which authorities may hold will help to determine upon what class of goods taxes will be levied. If it be decided that prices should be affected as little as possible, while little consideration is given to marginal producers, taxes will be secured from such extractive industries as agriculture, mining, and forestry, because of their condition of increasing costs of production. If it be decided that industry should be left as intact as possible and that the consumer can bear the price increases, then the objects of taxation will be those produced by large-scale establishments.