1. Economics 001. Principles of Microeconomics. Professor Arik Levinson. •
Lecture 7. –Tax incidence. Tax incidence. DN: Nominal incidence, or statutory ...
Tax incidence
Economics 001 Principles of Microeconomics Professor Arik Levinson
DN: Nominal incidence, or statutory incidence, is borne by those
who physically pay the tax. It's what the law says.
•Lecture 7 –Tax incidence
DN: Economic incidence is borne by those who suffer economic
loss as a result of the tax.
Example: A $3.00 cigarette tax -Suppliers bear the nominal incidence
Example: A $3.00 cigarette tax -Consumers bear the nominal incidence Dtax D
Stax
P
$3.00
PC =P2
P
S Economic Incidence: Consumers pay PC-P1 Suppliers pay P1-PS
P1 PS
S Economic Incidence: Consumers pay PC-P1
$3.00
PC
Suppliers pay P1-PS
P1 PS =P2
D Q2 Q1
Cigarettes
The nominal incidence is irrelevant to the economic incidence.
Q2 Q1
Cigarettes
Tax Division and Elasticity of Demand • Two Extremes – Perfectly inelastic demand--buyer pays • Example: Insulin
– Perfectly elastic demand--seller pays • Example: Pink marker pens
1
S
2.20
S + tax Buyer pays entire tax
S
2.20
Perfectly Inelastic Demand
2.00
Sales Tax and the Elasticity of Demand Price (dollars per dose)
Price (dollars per dose)
Sales Tax and the Elasticity of Demand
Perfectly Inelastic Demand
2.00
D
D
100 Quantity (thousands of doses per day)
100 Quantity (thousands of doses per day)
Sales Tax and the Elasticity of Demand
Sales Tax and the Elasticity of Demand
S + tax
Price (cents per pen)
Price (cents per pen)
S
S
1.00
1.00
Perfectly Elastic Demand
Perfectly Elastic Demand
Seller pays entire tax
0.90
0.90
1
1
4
Quantity (thousands of marker pens per week)
Tax Division and Elasticity of Demand • The division of the tax depends upon elasticity. – The more inelastic the demand, the more the buyer pays. – The more elastic the demand, the more the seller pays.
4
Quantity (thousands of marker pens per week)
Tax Division and Elasticity of Supply • Two Extremes – Perfectly inelastic supply — seller pays • Example: water from a mineral spring
– Perfectly elastic supply — buyer pays • Example: sand used to make silicon used by computer chip makers
2
Price (dollars per bottle)
Price (dollars per bottle)
Sales Tax and the Elasticity of Supply S
50
Perfectly Inelastic Supply
45
Sales Tax and the Elasticity of Supply S
50
Perfectly Inelastic Supply
Seller pays entire tax
45 D
D
100 Quantity (thousands of bottles per week)
100 Quantity (thousands of bottles per week)
Sales Tax and the Elasticity of Supply Price (cents per pound)
Price (cents per pound)
Sales Tax and the Elasticity of Supply Perfectly Elastic Supply 11
10
S
Perfectly Elastic Supply 11
S + tax buyer pays entire tax
10
S
D
3
D
5 Quantity (thousands of pounds per week)
Tax Division and Elasticity of Supply
3
Tax incidence in sum... Suppliers pay nominal incidence...
Suppliers pay nominal incidence... S
D
P
P S
• The division of the tax depends upon elasticity.
S D
S
– The more inelastic the supply, the more the seller pays.
Q
Consumers pay nominal incidence...
– The more elastic the supply, the more the buyer pays.
5 Quantity (thousands of pounds per week)
D
P
Q
Consumers pay nominal incidence... P
D
S D
S D
Q
Q
3
Deadweight Loss
DN: Deadweight Loss of a Tax = Social Costs above and beyond Tax revenue
