SIMON FRASER ECON290 Lecture Notes - Tax Incidence

SIMON FRASER ECON290 Lecture Notes - Tax Incidence - S=MSC...

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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 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 Q P D=MSB
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Unformatted text preview: 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 (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 (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 (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. 5 Q P S=MSC MSC + T Q* P* D1 D2 6...
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SIMON FRASER ECON290 Lecture Notes - Tax Incidence - S=MSC...

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