Elasticity and Excise Taxes Who ends up paying for an excise tax? 1

EXCISE TAX ON CIGARETTES P Demand- Inelastic Supply- Unitary $10 8 6 5 4 2 S CS $2 TAX on Producers D 8 10 Q 2

EXCISE TAX ON CIGARETTES P S1 $10 8 7 6 5 4 2 S CS After $6.50 =Pconsumers Amount Consumers Pay $2 TAX on Producers $4.50 = Pproducers Amount Producers Pay D 9 10 Q Quantity Doesn’t Fall VERY Much!!! 3

EXCISE TAX ON YACHTS $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q Demand- Elastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 4

EXCISE TAX ON YACHTS $2 TAX on Producers 5 P S1 $10 8 S 6 4 2 Pc Pp D DWL? Pp D 7 10 Q Quantity Falls A lot!!! 5

EXCISE TAX ON CIGARETTES P S1 $10 8 7 6 5 4 2 S CS After Pconsumers = $7 Tax per Unit? Total Tax Revenue? Tax paid by consumers? Tax paid by producers? Total spending? Revenue for businesses? Pproducers = $4 D 20 30 Q 6

EXCISE TAX ON CIGARETTES P S1 $10 8 7 6 5 4 2 S CS After Pconsumers = $7 Tax per Unit = $3 Total Tax Revenue = $60 Tax Paid by Consumers = $40 Tax Paid by Producers = $20 Total Spending = $140 Revenue for Businesses=$80 Pproducers = $4 D 20 30 Q 7