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

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Presentation transcript:

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

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

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

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

Conclusion 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.