Incidence of ad valorem taxes © Allen C. Goodman 2014

Consider Demand and Supply Supply Ps = a + b Qs; b > 0 Demand Pd = c + d Qd; d < 0 If we set Ps = Pd, then Price Quantity c a Demand Supply Q*

DW TAX Suppose there is an ad valorem tax Tax parameter is , so if there is a 10% tax,  = (1+tax) = (1+0.10) = 1.1 Impose on Supplier Supply – Why? Ps´= a  + b  Qs Demand Pd = c + d Qd If we set Ps´ = Pd, then Price Quantity c a Demand Supply Q*Q** aαaα

TAX DW Suppose there is an ad valorem tax Tax is , so if there is a 10% tax,  = 1.1 Impose on Demander Supply Ps = a + b Qs Demand Pd´ = (c/  ) + (d /  ) Qd If we set Ps = Pd´, then Price Quantity c a Demand Supply Q*Q*** c/α

Does Q** always equal Q*** At least with linear supply and demand curves, yes! Example

If Q** = Q*** Incidence (producers, consumers) is always the same. DW Loss is always the same!