the_incidence_of_a_sales_tax

the_incidence_of_a_sales_tax - W e u se th e sam e m eth o...

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Unformatted text preview: W e u se th e sam e m eth o d as w e d id to e v alu a te B eg in w ith th e n o -ta x eq u ilib riu m : D (P) = S (P) dP dM ab o v e. N o w a sp ec ific tax , τ p er u n it, p aid b y th e su p p lie rs to th e tax a u th o rities, d riv es a w ed g e b e tw e en t h e d em an d p rice an d th e su p p ly p rice : PD − τ = PS w h ere P D is th e m ark e t p rice p aid b y co n s u m e rs. S o in th e n ew eq u ilib riu m ; D ( PD ) = S ( PD − τ ) w h ich , o f c o u rse m ak es th e n ew m ark et p rice P D an im p licit fu n c tio n o f τ . S o : D [ PD ( τ )] = S [ PD ( τ ) − τ ] D iffere n tiatin g w ith re sp e ct to τ (u sin g th e ch a in ru le ): d D d PD d S d PS d S d Pd = = ( − 1) d PD d τ d PS d τ d PS d τ d PD = dS dD dτ − d PS d PD m u ltip lyin g th e n u m erato r a n d d en o m in ato r o f th e rh s b y P g iv es: Q dS d PS d PD η = dτ η−ε so if d em an d p erfec tly in elastic ( ε = 0 ) co n su m e rs b ea r fu ll b u rd en . B y p arallel reaso n in g : d PS ε = dτ η−ε if su p p ly p erfectly in e la stic, su p p liers b ear fu ll b u rd en . an d d PD d τ η = d PS d τ ε (w h ic h is n eg a tiv e as th e d em a n d elasticity, ε , is n eg a tiv e an d th e su p p ly elasiticity, η , is p o sitive ). T h e b u rd en is sh ared b etw een co n su m ers an d p ro d u c ers in in v erse p ro p o rtio n to th eir re sp ective elasticitie s . ...
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This note was uploaded on 03/03/2010 for the course ECON 1001 taught by Professor Donaldberry during the Spring '09 term at UCL.

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