Principles of Economics- Mankiw (5th) 125

Principles of Economics- Mankiw (5th) 125 - CHAPTER 6 S U P...

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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 129 To analyze these proposals, we need to address a simple but subtle question: When the government levies a tax on a good, who bears the burden of the tax? The people buying the good? The people selling the good? Or, if buyers and sellers share the tax burden, what determines how the burden is divided? Can the gov- ernment simply legislate the division of the burden, as the mayor is suggesting, or is the division determined by more fundamental forces in the economy? Econo- mists use the term tax incidence to refer to these questions about the distribution of a tax burden. As we will see, we can learn some surprising lessons about tax in- cidence just by applying the tools of supply and demand. HOW TAXES ON BUYERS AFFECT MARKET OUTCOMES We first consider a tax levied on buyers of a good. Suppose, for instance, that our local government passes a law requiring buyers of ice-cream cones to send $0.50 to the government for each ice-cream cone they buy. How does this law affect the
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