The Incidence of Taxation

The incidence of taxation Indirect taxes

S P Q O Effect of a tax on the supply curve

S + specific tax S amount of specific tax P Q O Effect of a tax on the supply curve

S + ad valorem tax S P Q O Effect of a tax on the supply curve

The incidence of taxation Effect of indirect taxes on market price and quantity Effect of indirect taxes on market price and quantity

S P Q O P1P1 Q1Q1 D Effect of a tax on price and quantity

S + tax S O P 1 + tax P1P1 P2P2 Q1Q1 Q2Q2 D P Q Effect of a tax on price and quantity

The incidence of taxation The incidence of indirect taxes: effects of different demand and supply elasticities

S + tax S O P1P1 Q1Q1 D P Q Incidence of tax: inelastic demand

S + tax S O P1P1 P2P2 Q2Q2 Q1Q1 D P Q Incidence of tax: inelastic demand

S + tax S O P1P1 P2P2 Q2Q2 Q1Q1 D CONSUMERS’ SHARE CONSUMERS’ SHARE P 2 - t PRODUCERS’ SHARE P Q Incidence of tax: inelastic demand

S + tax S O P1P1 Q1Q1 D P Q Incidence of tax: elastic demand

S + tax S O P1P1 P2P2 Q1Q1 D Q2Q2 P Q Incidence of tax: elastic demand

S + tax S O P1P1 P2P2 Q2Q2 Q1Q1 D CONSUMERS’ SHARE CONSUMERS’ SHARE P Q Incidence of tax: elastic demand

S + tax S O P 2 - t P1P1 P2P2 Q2Q2 Q1Q1 D CONSUMERS’ SHARE CONSUMERS’ SHARE PRODUCERS’ SHARE PRODUCERS’ SHARE P Q Incidence of tax: elastic demand

S + tax S O P1P1 Q1Q1 D P Q Incidence of tax: inelastic supply

S + tax S O P1P1 P2P2 Q1Q1 D Q2Q2 P Q Incidence of tax: inelastic supply

S + tax S O P1P1 P2P2 Q2Q2 Q1Q1 D P Q CONSUMERS’ SHARE Incidence of tax: inelastic supply

S + tax S O P 2 - t P1P1 P2P2 Q2Q2 Q1Q1 D P Q CONSUMERS’ SHARE PRODUCERS’ SHARE Incidence of tax: inelastic supply

S + tax P Q O P1P1 Q1Q1 D S Incidence of tax: elastic supply

S + tax P Q O P1P1 P2P2 Q1Q1 D Q2Q2 S Incidence of tax: elastic supply

S + tax P Q O P1P1 P2P2 Q2Q2 Q1Q1 D S CONSUMERS’ SHARE CONSUMERS’ SHARE Incidence of tax: elastic supply

S + tax P Q O P 2 - t P1P1 P2P2 Q2Q2 Q1Q1 D S CONSUMERS’ SHARE CONSUMERS’ SHARE PRODUCERS’ SHARE PRODUCERS’ SHARE Incidence of tax: elastic supply

Conclusion: Using the four extremes of elasticity it is now possible to discuss the effects of putting a tax on any particular product with respect to: 1. Incidence: the more __________ is demand and the more _________ is supply the higher the incidence of a tax on consumers. The more elastic is demand and the more inelastic is supply the higher is the incidence of a tax on producers. t 2. Government revenue: this will be greater the lower the elasticity of demand and the lower the elasticity of supply. 3. Resource allocation: will be most affected the higher is the elasticity of demand and the higher the elasticity of supply.