Taxes and subsidies change the price of goods and, as a result, the quantity consumed. There is a difference between an Ad valorem tax and a specific tax or subsidy in the way it is applied to the price of the good. In the end levying a tax moves the market to a new equilibrium where the price of a good paid by buyers increases and the proportion of the price received by sellers decreases. The incidence of a tax does not depend on whether the buyers or sellers are taxed since taxes levied on sellers are likely to be met by raising the price charged to buyers. Most of the burden of a tax falls on the less elastic side of the market because of a lower ability to respond to the tax by changing the quantity sold or bought. Introduction of a subsidy, on the other hand, may either lowers the price of production which encourages firms to produce more, or lowers the price paid by buyers, encouraging higher sales volume. Such a policy is beneficial both to sellers and buyers. Specific tax impact The effect of a specific tax levied on sellers can be divided into three steps. First, the demand for a good is the same for a given price level so the demand curve does not change. On the other hand, the tax makes the good in fact more expensive to produce for the seller. This means that the business is less profitable for a given price level and the supply curve shifts upwards. Second, the higher cost of producing the good reduces the quantity supplied at any given price. The upward shifted supply curve is parallel to the original supply curve because no matter the quantity supplied, the seller’s expenses on the production are the same. Therefore the distance between the original and the new shifted supply curve is equal to the amount of tax imposed. Whatever the price of the good, the net price for which the sellers are selling is effectively the gross price less the amount of the tax. This makes the sellers supply the amount of the good as if the price were lower by the amount of the tax. In order for them to supply a given quantity of the good, the market price needs to be higher by the amount of tax to preserve net income from sales.