Lecture Notes - Tax Incidence

Lecture Notes - Tax Incidence - Q P D=MSB S=MSC MSC + T Q*...

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Tax Incidence (chapter 11, pages 403 - 409) Tax incidence : Distribution of the tax burden between producer and consumer. Tax burden can be transferred from those who ware legally liable for it to others. This is called the shifting of a tax . Forward shifting of a tax is a transfer of the tax burden from producers (who are liable for its payment) to consumers as a result of an increase in the price of the taxed good. Backward shifting of a tax is a transfer of the tax burden from buyers (who are liable for its payment) to producers through a decrease in the price of the taxed good. Q P D=MSB S=MSC MSC + T MSB - T Q* P* P c P f Q 1
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The incidence of a tax is independent of whether it is collected from the consumers or producers. Tax incidence and the price elasticities of demand and supply (1) Perfectly elastic demand
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Unformatted text preview: Q P D=MSB S=MSC MSC + T Q* P c = P* P f Q 1 No tax is passed along to consumers Entire tax is paid by producers (2) Perfectly inelastic demand Q P D=MSB S=MSC MSC + T Q* P f = P* P c No efficiency loss Entire tax is passed along to consumers (3) Perfectly elastic supply Q P D=MSB S=MSC MSB - T Q* P f = P* P c Q 1 Consumers pay all taxes (4) Perfectly inelastic supply Q P D=MSB S=MSC MSB - T Q* P c = P* P f No tax is passed along to consumers Producers pay all taxes General result: Other things being equal, the more inelastic the demand for a taxed good, the greater is the portion of the tax borne by consumers. Other things being equal, the more inelastic the supply of a taxed good, the greater is the portion of a tax borne by producers. Q P S=MSC MSC + T Q* P* D1 D2...
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This note was uploaded on 10/12/2009 for the course ECON 290 taught by Professor J liu during the Fall '06 term at Simon Fraser.

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Lecture Notes - Tax Incidence - Q P D=MSB S=MSC MSC + T Q*...

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