1. Tax Incidence & Elasticity
Who actually bears the burden of taxes?
Chapter 6 (pages )

2. Buyers have higher tax incidence
Regardless of who pays the tax directly to the Gov’t => buyers & sellers both share some of the tax incidence (tax burden)
Buyers pay more
Sellers receive less
Tax incidence- is the study of who pays a higher burden of a tax
i.e. who pays a higher % of an excise tax
Buyers have higher tax incidence
If buyers pay $1.50
$2 per unit tax
Sellers pay $0.50 22 30

3. Tax Incidence & Elasticity
Tax incidence does not depend on who the tax is “placed on”
i.e. who “sends tax” to the Government
Tax incidence (tax burden) depends on the relative elasticity of demand versus elasticity of supply
Bottom line: Tax incidence is greater on the more inelastic market
The Steeper Curve pays more of the tax! 21 31

4. Shifting Supply or Demand Curves
Shifting the demand or supply curve is an “illusion”
It only tells you who “paid” the Gov’t => not who “pays more” of tax
Draw in the tax wedge first & label all new points
Label: Pb, Ps, DWL, Qty sold, CS, PS
Shift the curve last! (to either top of tax wedge or bottom)
The end result of the tax in terms of DWL, Tax Revenue, Tax Incidence is the same regardless of which curve you shift!

5. So Demand more inelastic
$.50 Cent Tax on Sellers
Example #1
Price
Last step:
tax on sellers
Shift supply to the
“top” of tax wedge D1
Price
buyers
pay S2
Tax Wedge = $0.50 S1
$3.30 90
Tax incidence?
P1 =
3.00
100
Buyers pay $0.30
Sellers pay $0.20
So Demand more inelastic
Equilibrium without tax
2.80
Price
sellers
receive
Quantity

6. Taxes & Shifting Supply/Demand
The end result of a curve shift is identical to a “tax wedge”
A tax on sellers shifts supply curve left by amount of tax
A tax on buyers shifts the demand curve left by amount of tax
If Gov’t taxes Sellers
Seller pays Gov’t
Supply left to “top of wedge”
If Gov’t taxes Buyers
Buyer pays Gov’t
Demand left (bottom of wedge)

7. Tax Incidence Worksheet
Total Welfare after Tax
DWL
Price Buyer pays
Price Seller Receives