Incidence of ad valorem taxes © Allen C. Goodman 2014

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

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

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

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

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