CECN104 - Assignment#2

CECN104 - Assignment#2 - Page | 1 1 PART C The burden of a...

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P a g e | 1 1 – PART C The burden of a sales (or excise) tax is distributed between consumers and sellers in a manner that depends on the relative elasticities of demand and supply. Some products that are subjected to sales tax in Canada include cigarettes , alcoholic beverages , and gasoline . Using cigarettes as an example; the questions, who bears the burden of these taxes and why, is answered below with illustrative diagrams: A sales tax means that the price paid by the customer and the price received by the seller, must now differ by the amount of the tax (t). The burden of the sales tax is shared by consumers and sellers. The tax increases the consumer price and reduces the seller price. It also reduces the equilibrium quantity exchanged, as shown in diagram 1.1.
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P a g e | 2 In the example used, diagram 1.2 suggests that the sales tax burden fall on the consumers of cigarettes. The demand for cigarettes is inelastic both overall and relative to supply, suggesting that a cigarette-tax increase would be borne more by consumers than by producers (sellers). In order for suppliers to face the burden of tax increase the supply has to be inelastic relative to demand. Moreover, if there are large reductions in cigarette taxes than the producer (supplier) will have a pay more taxes than the consumer. Such a
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This note was uploaded on 12/13/2010 for the course X X taught by Professor X during the Spring '10 term at Ryerson.

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CECN104 - Assignment#2 - Page | 1 1 PART C The burden of a...

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