Incidence of a tax

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Incidence of a tax
The Incidence of a sales tax
• The incidence of a sales tax describes who
actually bears the burden of the tax.
– What portion of the tax does the producer pay?
– What portion of the tax does the consumer pay?
An Indirect Tax
S+tax
Indirect taxes
increase costs and
shift the supply
curve to the left
S
Price
Pm
D
Qm
Quantity
An Indirect Tax
S+tax
Consumers pay
the new
equilibrium price Pc
S
Price
Pc
Pm
D
Qm
Quantity
An Indirect Tax
S+tax
The per unit tax is
measured by the
vertical distance
between the two
supply curves
S
Price
Pc
Pm
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
The producer
recieves the lower
price - Pp
S
Price
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
The government
receives the
shaded area as tax
revenue
S
Price
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
S
Price
Original CS
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
S
Price
New CS
Pc
Pm
Pp
D
Q’
Qm
The area of tax which
was previously CS
represents the
incidence of the tax on
consumers
Quantity
An Indirect Tax
S+tax
S
Price
Original PS
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
S
Price
New PS
Pc
Pm
Pp
D
Q’
Qm
The area of tax which
was previously PS
represents the
incidence of the tax on
producers
Quantity
An Indirect Tax
S+tax
S
Price
DWL
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
Original PS
S+tax
S
Price
What area represents
the incidence of the
tax on producers?
Pc
Pm
Pp
D
Q’
Qm
The area of producer
surplus they have lost
and is now tax
revenue to the
government.
Quantity
An Indirect Tax
S+tax
Original CS
S
Price
What area represents
the incidence of the
tax on consumers?
Pc
Pm
Pp
D
Q’
Qm
The area of consumer
surplus they have lost
and is now tax
revenue to the
government.
Quantity
The incidence of indirect taxes: depends on different
demand elasticity's
Relatively Inelastic Demand
St
Price
P1
P
S
Incidence
on
Price
Consumers
Relatively Elastic Demand
St
S
P1
P
Incidence
on
Consumers
D
D
Incidence
on
Producers
Q1 Q
Quantity
Incidence
on
Producers
Q1
Q
Quantity
When
Whenaasales
salestax
taxisisimposed
imposedon
onaagood
goodwith
witharelatively
relativelyinelastic
elastic demand,
demand,the
quantity
the government
demanded
is able
is more
to raise
responsive
a large to
amount
a change
of tax
in price.
revenue,
Thesuppliers
government is
not
willable
not to
suffer
raisea as
large
much
drop
taxinrevenue,
sales andand
thesuppliers
incidencewill
of suffer
the taxafalls
largemore
drop in
sales,
heavily
however
on the the
consumer
incidence will fall more heavily on the producer.
Excise Tax
An excise tax is a tax on the sale of a commodity
such as cigarettes, petrol or alcohol.
• Excise taxes will raise the most revenue and
result in the least DWL when the price
elasticity of demand for the commodity is low.
The Incidence of Subsidies
• With a subsidy on consumer goods and
services as medicine or public transport, the
benefits will flow on to the consumer in the
form of lower prices.
– Who will benefit the most?
– By how much?
– How is this affected by differing levels of PED
The incidence of Subsidies - Copy
• The incidence of subsidy shows the extent to
which consumers or producers will gain from
the subsidy.
A Subsidy
S
Price
Pm
D
Qm
Quantity
A Subsidy
Subsidies reduce
costs and increase
Supply
S
Price
S+Subsidy
Pm
D
Qm
Quantity
A Subsidy
Consumers pay
the new
equilibrium price
- Pc
S
Price
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
S+Subsidy
Pm
The per unit
subsidy is
represented by the
vertical distance
between the two
supply curves
Pc
D
Qm
Q’
Quantity
A Subsidy
Producers receive
higher price -Pp
S
Price
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
The total cost to
the government is
represented by the
shaded area
S
Price
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
Original CS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
New CS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
The gain in CS
represents the
incidence of a
subsidy on
consumers
Quantity
A Subsidy
S
Price
Old PS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
New PS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
The gain in PS
represents the
incidence of a
subsidy on
producers
Quantity
A Subsidy
S
Price
DWL
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
The incidence of subsidies
The incidence of subsidies:
effects of different demand
elasticities
Incidence of a subsidy: elastic
demand
P
P2 +S
S
Producers
share
P1
S + subsidy
Consumers share
P2
O
fig
D
Q1
Q2
Q
Who receives the subsidy?
• When the price elasticity of a good is
elastic, the producers end up receiving
most of the subsidy.
Incidence of a subsidy: inelastic
demand
P
S
P2 + S
P1
S + subsidy
Producers share
Consumers
Share
P2
D
O
fig
Q1
Q2
Q
Who receives the subsidy?
• When price elasticity of demand is
Inelastic, the consumers will receive
most of the subsidy.
• This occurs for goods that are a
necessity (hence an inelastic demand
curve).

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