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microbook_3e-page53 - (a tax on sales – the producer or...

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Supply Elasticity x As alluded to at the beginning of the lecture, there’s also an elasticity of supply. S S supply Q P ǻ P ǻ Q e ¡ x the component ǻ P ǻ Q corresponds to the slope of a supply function such as: 2P 3 Q S . , in which case: 2 ǻ P ǻ Q x ǻ P ǻ Q is also the inverse of the slope of the supply curve (when we plot price on the vertical axis and quantity of the horizontal axis) x the component Q P corresponds to the current price of the good and the quantity that producers sell at that price. Who Pays an Excise Tax? x Legislators may fuss and worry over who should pay an excise tax
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Unformatted text preview: (a tax on sales) – the producer or the consumer x But economists know that the true burden of the tax falls more heavily on the one who has a lower elasticity of supply/demand If the consumer’s demand is very inelastic and the producer’s supply is very elastic, then the consumer bears more of the tax burden. If the consumer’s demand is very elastic and the producer’s supply is very inelastic, then the producer bears more of the tax burden. Page 53...
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