Incidence of a tax

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

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

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

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

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

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

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

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

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

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

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

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

15. The incidence of indirect taxes: depends on different demand elasticity's Relatively Inelastic Demand Relatively Elastic Demand St Incidence on Consumers St Price Price S S P1 P1 P Incidence on Consumers D P D Incidence on Producers Q1 Q Q1 Q Quantity Quantity Incidence on Producers 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. 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

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 S Price Pm D Qm Quantity

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

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

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

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

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

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

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

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

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

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

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

31. Incidence of a subsidy: elastic demand P S P2 +S Producers share S + subsidy P1 Consumers share P2 D Q1 O Q2 Q fig

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

33. Incidence of a subsidy: inelastic demand P S S+ subsidy P2 + S Producers share P1 Consumers Share P2 D O Q1 Q Q2 fig

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).