1. Incidence of a tax

2. The Incidence of a sales tax The incidence of a sales tax describes who actually bears the burden of the tax. – What portion of the tax does the producer pay? – What portion of the tax does the consumer pay?

3. An Indirect Tax Price Quantity S D Pm Qm Indirect taxes increase costs and shift the supply curve to the left S+tax

4. An Indirect Tax Price Quantity S D Pm Qm Consumers pay the new equilibrium price - Pc S+tax Pc

5. An Indirect Tax Price Quantity S D Pm Qm The per unit tax is measured by the vertical distance between the two supply curves S+tax Q’ Pc

6. An Indirect Tax Price Quantity S D Pm Qm The producer recieves the lower price - Pp S+tax Q’ Pc Pp

7. An Indirect Tax Price Quantity S D Pm Qm The government receives the shaded area as tax revenue S+tax Q’ Pc Pp

8. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp Original CS

9. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp New CS The area of tax which was previously CS represents the incidence of the tax on consumers

10. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp Original PS

11. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp New PS The area of tax which was previously PS represents the incidence of the tax on producers

12. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp DWL

13. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp Original PS What area represents the incidence of the tax on producers? The area of producer surplus they have lost and is now tax revenue to the government.

14. An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp Original CS What area represents the incidence of the tax on consumers? The area of consumer surplus they have lost and is now tax revenue to the government.

15. The incidence of indirect taxes: depends on different demand elasticity's Quantity Price D Relatively Inelastic Demand S St Q1Q P1 P Incidence on Consumers Incidence on Producers Quantity Price D Relatively Elastic Demand S St Q P Q1 P1 Incidence on Producers Incidence on Consumers When a sales tax is imposed on a good with relatively inelastic demand, the government is able to raise a large amount of tax revenue, suppliers will not suffer a large drop in sales and the incidence of the tax falls more heavily on the consumer When a sales tax is imposed on a good with a relatively elastic demand, the quantity demanded is more responsive to a change in price. The government is not able to raise as much tax revenue, and suppliers will suffer a large drop in sales, however the incidence will fall more heavily on the producer.

16. Excise Tax Excise taxes will raise the most revenue and result in the least DWL when the price elasticity of demand for the commodity is low. An excise tax is a tax on the sale of a commodity such as cigarettes, petrol or alcohol.

17. The Incidence of Subsidies With a subsidy on consumer goods and services as medicine or public transport, the benefits will flow on to the consumer in the form of lower prices. – Who will benefit the most? – By how much? – How is this affected by differing levels of PED

18. The incidence of Subsidies - Copy The incidence of subsidy shows the extent to which consumers or producers will gain from the subsidy.

19. A Subsidy Price Quantity S D Pm Qm

20. A Subsidy Price Quantity S D Pm Qm Subsidies reduce costs and increase Supply S+Subsidy

21. A Subsidy Price Quantity S D Pm Qm Consumers pay the new equilibrium price - Pc S+Subsidy Q’ Pc

22. A Subsidy Price Quantity S D Pm Qm The per unit subsidy is represented by the vertical distance between the two supply curves S+Subsidy Q’ Pc

23. A Subsidy Price Quantity S D Pm Qm Producers receive higher price -Pp S+Subsidy Q’ Pc Pp

24. A Subsidy Price Quantity S D Pm Qm The total cost to the government is represented by the shaded area S+Subsidy Q’ Pc Pp

25. A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp Original CS

26. A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp New CS The gain in CS represents the incidence of a subsidy on consumers

27. A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp Old PS

28. A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp New PS The gain in PS represents the incidence of a subsidy on producers

29. A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp DWL

30. The incidence of subsidies The incidence of subsidies: effects of different demand elasticities

31. fig S + subsidy S O P 2 +S P1P1 P2P2 Q2Q2 Q1Q1 D Incidence of a subsidy: elastic demand P Q Consumers share Producers share

32. Who receives the subsidy? When the price elasticity of a good is elastic, the producers end up receiving most of the subsidy.

33. fig Incidence of a subsidy: inelastic demand S + subsidy S O P1P1 P2P2 Q2Q2 Q1Q1 D P Q P 2 + S Consumers Share Producers share

34. Who receives the subsidy? When price elasticity of demand is Inelastic, the consumers will receive most of the subsidy. This occurs for goods that are a necessity (hence an inelastic demand curve).