page_title: Cost-of-production theory of value
section_title: Taxes and subsidies
hierarchical_section_title: Cost-of-production theory of value / Taxes and subsidies
context_page_description: In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production and taxation.
  The theory makes the most sense under assumptions of constant returns to scale and the existence of just one non-produced factor of production. These are the assumptions of the so-called non-substitution theorem. Under these assumptions, the long-run price of a commodity is equal to the sum of the cost of the inputs into that commodity, including interest charges
context_section_description: Taxes and subsidies change the price of goods and services. A marginal tax on the sellers of a good will shift the supply curve to the left until the vertical distance between the two supply curves is equal to the per unit tax; other things remaining equal, this will increase the price paid by the consumers (which is equal to the new market price) and decrease the price received by the sellers. Marginal subsidies on production will shift the supply curve to the right until the vertical distance between the two supply curves is equal to the per unit subsidy; other things remaining equal, this will decrease price paid by the consumers (which is equal to the new market price) and increase the price received by the producers.
caption: A supply and demand diagram illustrating taxes' effect on prices.