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Tax Incidence & Elasticity

Tax Incidence & Elasticity

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Tax Incidence & Elasticity

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  1. Tax Incidence & Elasticity Who actually bears the burden of taxes? Chapter 6 (pages 124-131)

  2. Tax Incidence • Regardless of who pays the tax directly to the Gov’t => buyers & sellers both share some of the tax incidence (tax burden) • Buyers pay more &Sellers receive less • Tax incidence- is the study of who pays a higherburden of a tax • i.e. who pays a higher % of an excise tax Buyers have higher tax incidence If buyers pay $1.50 $2 per unit tax Sellers pay $0.50

  3. The Steeper Curve pays more of the tax! Tax Incidence & Elasticity • Tax incidence does not depend on who the tax is “placed on” • i.e. who “sends tax” to the Government • Tax incidence (tax burden) depends on the relative elasticity of demand versus elasticity of supply • Bottom line:Tax incidence is greater on the moreinelastic market

  4. Shifting Curves with Excise Tax • Draw in the tax wedge first & label all new points • Label: Pb, Ps, DWL, Qty sold, CS, PS • Shift the curve of who the Gov’t places the “tax on” • Tax on Buyers => shift Demand Curve • Tax on Sellers => shift Supply Curve • End result: Shift only tells you “who sent check to Gov’t” • DWL, Tax Revenue, Tax Incidence is the same regardless of which curve you shift! • to bottom of tax wedge or top

  5. Last step: tax on sellers Price S2 buyers Tax Wedge = $0.50 Shift supply to the “top” of tax wedge pay S1 $3.30 Tax incidence? 3.00 P1 = 2.80 Equilibrium without tax Price sellers receive D1 90 100 Example #1 $.50 Cent Tax on Sellers Price Buyers pay $0.30 Sellers pay $0.20 So Demand more inelastic Quantity 0

  6. Taxes & Shifting Supply/Demand • The end result of a curve shift is identical to a “tax wedge” • A tax on sellersshifts supply curve left by amount of tax • A tax on buyers shifts the demand curve left by amount of tax If Gov’t taxes Sellers Supply left to “top of wedge” Seller pays Gov’t Buyer pays Gov’t If Gov’t taxes Buyers Demand left (bottom of wedge)

  7. Tax Incidence Worksheet Total Welfare after Tax DWL Price Buyer pays Price Seller Receives