Tax Burden & Elasticity DSP(4) – Market Intervention The Relationship Between

P per-unittax S2S2S2S2 S1S1S1S1 Q0 P1P1 Q1Q1 P2P2 Q2Q2 D Consumers’ tax burden Sellers’ is smaller than

per-unittax P Q0 S1S1S1S1 S2S2S2S2

P1P1 Q1Q1 P2P2 Q2Q2 Consumers’ tax burden Sellers’ is larger than per-unittax P Q0 S1S1S1S1 S2S2S2S2 D

P1P1 Q1Q1 P2P2 Q2Q2 per-unittax P Q0 S1S1S1S1 S2S2S2S2D

P per-unittax S2S2S2S2 S1S1S1S1 Q0 P1P1 Q1Q1 P2P2 Q2Q2 D

when the demand is elastic. This condition is NOT clear enough ! Consumers’ tax burden Sellers’ is smaller than 1. when the demand is more elastic than the supply. OR when the elasticity of demand is larger than the elasticity of supply. the elasticity of supply. P per-unittax S2S2S2S2 S1S1S1S1 Q0 P1P1 Q1Q1 P2P2 Q2Q2 D

Consumers’ tax burden Sellers’ is larger than 2. when the demand is less elastic than the supply. OR when the elasticity of demand is smaller than the elasticity of supply. the elasticity of supply. P1P1 Q1Q1 P2P2 Q2Q2 per-unittax P Q0 S1S1S1S1 S2S2S2S2D

“The larger the elasticity, the smaller the tax burden, and vice versa.” P1P1 Q1Q1 P2P2 Q2Q2 per-unittax P Q0 S1S1S1S1 S2S2S2S2D P per-unittax S2S2S2S2 S1S1S1S1 Q0 P1P1 Q1Q1 P2P2 Q2Q2 D Under what condition both consumers and sellers would bear the SAME amount of tax burden? Under what condition both consumers and sellers would bear the SAME amount of tax burden?

Sellers’ tax burden per-unittax S2S2S2S2 S1S1S1S1 P1P1 Q1Q1 P 2 = Q2Q2 PQ0 D 3. If the demand is perfectly elastic Per-unit tax  S decreases (S curve shifts up)  P remains unchanged and Q decreases Tax revenue Sellers will bear the whole tax burden while consumers will bear nothing.

P2P2Consumers’ tax burden Q1Q1 = Q 2PQ0 4. If the demand is perfectly inelastic Per-unit tax  S decreases (S curve shifts up)  P increases and Q remains unchanged Tax revenue Consumers will bear the whole tax burden while sellers will bear nothing. P1P1 per-unittax S2S2S2S2 S1S1S1S1 D

Consumers’ tax burden Q1Q1 Q2Q2PQ0 5. If the supply is perfectly elastic Per-unit tax  S decreases (S curve shifts up)  P increases and Q decreases Tax revenue Consumers will bear the whole tax burden while sellers will bear nothing. P1P1 S1S1S1S1 D per-unittax S2S2S2S2 P2P2

Sellers’ tax burden Q1Q1PQ0 6. If the supply is perfectly inelastic Per-unit tax  S decreases (S curve shifts up)  both P and Q remain unchanged Tax revenue P1P1 S1S1S1S1D per-unittax = S 2 Sellers will bear the whole tax burden while consumers will bear nothing. P 2 = = Q 2

IS IT DIFFICULT? The government may provide subsidy to sellers in order to encourage them to produce more. When the government imposes sales tax on sellers, generally the price will rise and the quantity will fall; both consumers and sellers will bear different amount of tax burdens.