1. Incidence of ad valorem taxes
© Allen C. Goodman 2014

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

3. Suppose there is an ad valorem tax
Price
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
Supply c
Demand
TAX DW aα a
Q** Q*
Quantity

4. Suppose there is an ad valorem tax
Price
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
Supply c
Demand
c/α
TAX DW a
Q*** Q*
Quantity

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

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