ECN 104 Lecture Notes - Lecture 7: Poll Tax Riots, Deadweight Loss, Tax Wedge

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An excise tax is a per-unit tax on sales of a good or service. Fuel-inefficient automobiles (consumption of 16 or more litres per 100 kilometres, Create a wedge between the two prices. The incidence of a tax is a measure of who really bears the tax burden (in the form of higher prices to consumers and lower prices to sellers). Incidence does not depend on who officially pays the tax. Incidence depends on the shapes of supply and demand curves (price elasticities). When the price elasticity of demand is higher than the price of elasticity of supply, an excise tax falls mainly on producers. When the price elasticity of supply is higher than the price elasticity of demand, an excise tax falls mainly on consumers. So elasticity - not who officially pays the tax - determines the incidence of an excise tax.

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