In my bachelor thesis, I present the view of modern mainstream economics on price formation and effect of taxes on price level. Then, I contrast this view with the theory of Austrian school of economics. While the mainstream economic theory assumes certain fraction of the VAT-rate to be passed forward immediately, that action does not have support in the Austrian theory of price formation. According to Austrian economists, passing the costs of taxation forward takes time. The prices of consumpti... show full abstractIn my bachelor thesis, I present the view of modern mainstream economics on price formation and effect of taxes on price level. Then, I contrast this view with the theory of Austrian school of economics. While the mainstream economic theory assumes certain fraction of the VAT-rate to be passed forward immediately, that action does not have support in the Austrian theory of price formation. According to Austrian economists, passing the costs of taxation forward takes time. The prices of consumption goods rise because of lower quantity supplied, which is caused by lower demand for factors of production. The thesis hypothesis is proven correct by econometric model estimating a statistically significant rise in aggregate price level as a result of VAT-rate rise. Assumption of statistically significant rise in price level in a month before the VAT-rate rise was not proven correct. |