ECN 104 Lecture Notes - Lecture 7: Elastin, Clastic Rock, Poll Tax Riots

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An excise tax is a per-unit tax on sales of a good or service. Petroleum product (unleaded gas: sh. 10 per litre) Fuel-efficient automobiles (consumption of 16 or more litres per 100 kilometers, ,000 per car) Create a wedge between the two prices. The incidence of a tax is a measure of who really bears the tax burden (in the form of higher prices to consumers and lower prices to sellers) Two important principles of taxation: incidence does not depend on who officially pays the tax, incidence depends on the shapes of supply and demand curves (price elasticities) When the price elasticity of demand is higher than the price elasticity of supply, an excise tax falls mainly on producers. When the price elasticity of supply is higher than the price elasticity of demand, an excise tax falls mainly on consumers. So elasticity not who officially pays the tax determines the incidence of an excise tax.

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