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

2. Tax Incidence
Tax incidence- is the study of who bears the burden of a tax
Regardless of who pays the tax directly to the Gov’t => buyers & sellers both bear some of the tax incidence (burden)
Buyers pay a higher price
Sellers Receive a lower price 22 30

3. Tax Incidence & Elasticity
The degree of 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. Taxes & Shifting Supply/Demand
A tax on sellers shifts the supply curve left by amount of tax
End result is identical to drawing a “tax wedge”
A tax on buyers shifts the demand curve left by amount of tax
If Gov’t taxes Sellers
Seller pays Gov’t
Shift supply left
If Gov’t taxes Buyers
Buyer pays Gov’t
Shift demand left

5. $.50 Cent Tax on Sellers Price of Ice-Cream D1 Price buyers pay Cone
Example #1
Price of
Ice-Cream D1
A tax on sellers
shifts supply
left by size of tax
($0.50)
Price
buyers
pay
Cone S2
Equilibrium
with tax S1
$3.30 90
Tax ($0.50)
Price
without
tax
3.00
100
Equilibrium without tax
2.80
Price
sellers
receive
Quantity of
Ice-Cream Cones

6. Shifting Supply or Demand Curves
Tax incidence does not depend on who the tax is “placed on”
i.e. who “sends tax” to the Government
Shifting the demand or supply curve is an “illusion”
It only tells you who “paid” the Gov’t => not who “bears” the burden
The end result of the tax in terms of DWL, Tax Revenue, Tax Incidence is the same regardless of which curve you shift!

7. $.50 Cent Tax on Buyers Price of Ice-Cream Price buyers pay Supply, S1
Cone D1 D2
$3.30 90
Equilibrium without tax
Tax ($0.50)
Price
without
tax
3.00
100
A tax on buyers
shifts demand
curve left by the
size of the tax
2.80
New Equilibrium
with tax
Price
sellers
receive
Buyers pay $0.30 of tax
Sellers pay $0.20 of tax
Result is the same as
When you taxed sellers!
Quantity of
Ice-Cream Cones

8. Tax Incidence Worksheet

9. Inelastic Curves lead to:
Tax incidence is higher on curve that is more inelastic
Shifting a curve only tells you who “pays” tax
Deadweight Loss is smaller for inelastic curves
Tax revenue raised is higher
Inelastic Curves lead to:
Higher tax incidence
Lower DWL
Higher Tax Revenue D S 30 41