ECO 201 Lecture Notes - Lecture 12: Excise, Tax Incidence
Document Summary
Tax incidence: is the study of how much of a tax is paid by consumers vs. producers. Excise tax (unit tax): fixed amount paid per unit. Ad valorem (percent tax): percentage tax on sales. Tax can be collected by sellers (usually) or buyers. A tax shifts the supply vertically by the amount of the tax. Mathematically, it is adding the amount of the tax to the vertical intercept. Sketch this market and find q* = p* P* = 16 (cid:1829)= (cid:2869)(cid:2870) (cid:886) (cid:890)=(cid:883)(cid:888) (cid:1842)= (cid:2869)(cid:2870) (cid:883)(cid:888) (cid:890)=(cid:888)(cid:886) To find the new, after-tax price, solve for equilibrium using the original demand equation and the now (after-tax) supply equation. Tax causes the market to become inefficient. Consumers pay $. 40 of tax in the form of higher price (20%). Producers pay . 6 of tax in the form of a lower after-tax price (. 4 vs ). (80%) Sellers will pay a greater share than consumers when supply is more inelastic than demand.
