Question

How does tax increase cost of production?

Answer 1

As with the specific tax, the tax raises production costs, but the amount of tax varies with price level.

Step-by-step explanation:

Answer 2

Tax incidence is the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it. The burden of the tax is not dependent on whether the state collects the revenue from the producer or consumer, but on the price elasticity of supply and the price elasticity of demand. To understand how elasticities influence tax incidence, it is important to consider the two extreme scenarios and how the tax burden is distributed between the two parties.