In our previous scenarios, we haven’t considered the effect of taxes. When we introduce we are going to look at it from the perspective of a flat tax. When we do this, the price a consumer pays equals the price a producer receives plus a tax. This does not mean the consumer fronts all the costs though, as we will see. In reality, there is a price that occurs without taxes, and then the consumer price and the producer price once a tax is introduced. Depending on the elasticity of both curves, one group will lose more than the other from the tax, unless it is the case that they lose an equal amount in terms of price.

Another important aspect of taxes is that there is deadweight loss. This is the loss of sales because a rising consumer price, and dropping producer price leads to less of both in the market. If a tax is too high, there may be little or no sales of the good. This leads to the Laffer Curve which illustrates that there is a point where higher taxes actually leads to decreased tax revenue.