The IncidenceThe Incidenceof Taxationof Taxation

The incidence of taxationThe incidence of taxation

Indirect taxesIndirect taxes

S

P

Q O

Effect of a tax on the supply curveEffect of a tax on the supply curve

S + specific tax

S

amount ofspecific tax

P

Q O

Effect of a tax on the supply curveEffect of a tax on the supply curve

S + ad valorem tax

S

P

Q O

Effect of a tax on the supply curveEffect of a tax on the supply curve

The incidence of taxationThe incidence of taxation

Effect of indirect taxes on market price

and quantity

Effect of indirect taxes on market price

and quantity

S

P

Q O

P1

Q1

D

Effect of a tax on price and quantityEffect of a tax on price and quantity

S + tax

S

O

P1 + tax

P1

P2

Q1Q2

D

P

Q

Effect of a tax on price and quantityEffect of a tax on price and quantity

The incidence of taxationThe incidence of taxation

The incidence of indirect taxes: effects of different

demand and supply elasticities

The incidence of indirect taxes: effects of different

demand and supply elasticities

S + tax

S

O

P1

Q1

D

P

Q

Incidence of tax: inelastic demandIncidence of tax: inelastic demand

S + tax

S

O

P1

P2

Q2 Q1

D

P

Q

Incidence of tax: inelastic demandIncidence of tax: inelastic demand

S + tax

S

O

P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’SHARE

P2 - t P2 - t PRODUCERS’ SHAREPRODUCERS’ SHARE

P

Q

Incidence of tax: inelastic demandIncidence of tax: inelastic demand

S + tax

S

O

P1

Q1

D

P

Q

Incidence of tax: elastic demandIncidence of tax: elastic demand

S + tax

S

O

P1

P2

Q1

D

Q2

P

Q

Incidence of tax: elastic demandIncidence of tax: elastic demand

S + tax

S

O

P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’SHARE

P

Q

Incidence of tax: elastic demandIncidence of tax: elastic demand

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’SHARE

PRODUCERS’ SHARE

PRODUCERS’ SHARE

P

Q

Incidence of tax: elastic demandIncidence of tax: elastic demand

S + tax

S

O

P1

Q1

D

P

Q

Incidence of tax: inelastic supplyIncidence of tax: inelastic supply

S + tax

S

O

P1

P2

Q1

D

Q2

P

Q

Incidence of tax: inelastic supplyIncidence of tax: inelastic supply

S + tax

S

O

P1

P2

Q2 Q1

D

P

Q

CONSUMERS’ SHARECONSUMERS’ SHARE

Incidence of tax: inelastic supplyIncidence of tax: inelastic supply

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

P

Q

CONSUMERS’ SHARECONSUMERS’ SHARE

PRODUCERS’ SHAREPRODUCERS’ SHARE

Incidence of tax: inelastic supplyIncidence of tax: inelastic supply

S + taxP

Q O

P1

Q1

D

S

Incidence of tax: elastic supplyIncidence of tax: elastic supply

S + taxP

Q O

P1

P2

Q1

D

Q2

S

Incidence of tax: elastic supplyIncidence of tax: elastic supply

S + taxP

Q O

P1

P2

Q2 Q1

D

SCONSUMERS’

SHARECONSUMERS’

SHARE

Incidence of tax: elastic supplyIncidence of tax: elastic supply

S + taxP

Q O

P2 - t

P1

P2

Q2 Q1

D

SCONSUMERS’

SHARECONSUMERS’

SHARE

PRODUCERS’ SHARE

PRODUCERS’ SHARE

Incidence of tax: elastic supplyIncidence of tax: elastic supply

S + tax

S

O

P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’SHARE

P2 - t P2 - t PRODUCERS’ SHAREPRODUCERS’ SHARE

P

Q

Incidence of tax: inelastic demandIncidence of tax: inelastic demandS + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

CONSUMERS’SHARE

CONSUMERS’SHARE

PRODUCERS’ SHARE

PRODUCERS’ SHARE

P

Q

Incidence of tax: elastic demandIncidence of tax: elastic demand

S + tax

S

O

P2 - t

P1

P2

Q2 Q1

D

P

Q

CONSUMERS’ SHARECONSUMERS’ SHARE

PRODUCERS’ SHAREPRODUCERS’ SHARE

Incidence of tax: inelastic supplyIncidence of tax: inelastic supplyS + tax

PRODUCERS’ SHARE

PRODUCERS’ SHARE

P

Q O

P2 - t

P1

P2

Q2 Q1

D

SCONSUMERS’

SHARECONSUMERS’

SHARE

Incidence of tax: elastic supplyIncidence of tax: elastic supply

Conclusion: Using the four extremes of elasticity it is now possible to discuss the effects of putting a tax on any particular product with respect to: 1. Incidence: the more __________ is demand and the more _________ is supply the higher the incidence of a tax on consumers. The more elastic is demand and the more inelastic is supply the higher is the incidence of a tax on producers.t2. Government revenue: this will be greater the lower the elasticity of demand and the lower the elasticity of supply. 3. Resource allocation: will be most affected the higher is the elasticity of demand and the higher the elasticity of supply.