Principles of Economics- Mankiw (5th) 129

Principles of Economics- Mankiw (5th) 129 - (b Inelastic...

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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 133 ELASTICITY AND TAX INCIDENCE When a good is taxed, buyers and sellers of the good share the burden of the tax. But how exactly is the tax burden divided? Only rarely will it be shared equally. To see how the burden is divided, consider the impact of taxation in the two markets in Figure 6-9. In both cases, the figure shows the initial demand curve, the initial supply curve, and a tax that drives a wedge between the amount paid by buyers and the amount received by sellers. (Not drawn in either panel of the figure is the new supply or demand curve. Which curve shifts depends on whether the tax is levied on buyers or sellers. As we have seen, this is irrelevant for the incidence of Price without tax Quantity 0 Price Demand Supply Tax Price sellers receive Price buyers pay (a) Elastic Supply, Inelastic Demand Price without tax Quantity 0 Price Demand Supply Tax Price sellers receive Price buyers pay
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Unformatted text preview: (b) Inelastic Supply, Elastic Demand 2. . . . the incidence of the tax falls more heavily on consumers . . . 1. When supply is more elastic than demand . . . 3. . . . than on producers. 2. . . . the incidence of the tax falls more heavily on producers . . . 3. . . . than on consumers. 1. When demand is more elastic than supply . . . Figure 6-9 H OW THE B URDEN OF A T AX I S D IVIDED . In panel (a), the supply curve is elastic, and the demand curve is inelastic. In this case, the price received by sellers falls only slightly, while the price paid by buyers rises substantially. Thus, buyers bear most of the burden of the tax. In panel (b), the supply curve is inelastic, and the demand curve is elastic. In this case, the price received by sellers falls substantially, while the price paid by buyers rises only slightly. Thus, sellers bear most of the burden of the tax....
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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