ECON 1050 Lecture : Economics-1 (1) (dragged) 3

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salmoneagle674

17 Sep 2016

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Tax incidence is the same regardless of whether the law says sellers pay or buyers pay. The division of the tax between buyers and sellers depends on the elasticities of demand and supply. To see how, we look at two extreme cases: perfectly inelastic demand: buyers pay the entire tax, perfectly elastic demand: sellers pay the entire tax. The more inelastic the demand, the larger is the buyers" share of the tax. Demand for this good is perfectly inelastic the demand curve is vertical. When a tax is imposed on this good, buyers pay the entire tax. The demand for this good is perfectly elastic the demand curve is horizontal. When a tax is imposed on this good, sellers pay the entire tax. The more elastic the supply, the larger is the buyers" share of the tax. The supply of this good is perfectly inelastic the supply curve is vertical.

Related Questions

Suppose the demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore, ____.

a. buyers bear most of the incidence of a tax on gasoline.

b. sellers bear most of the incidence of a tax on gasoline.

c. the government bears most of the incidence of a tax on gasoline.

d. the incidence of a tax on gasoline depends if the tax is imposed on sellers or on buyers.

cyangoat515

Label each of the following statements about the economics of taxes as true or false.

A) The incidence of a tax is determined by which group (buyers or sellers)
must actually pay the government.

B) When demand is inelastic and supply is elastic, the burden of a tax falls
mainly on producers.

C) When demand is elastic and supply is inelastic, the burden of a tax falls
mainly on consumers.

D) An excise tax can distort incentives and create missed opportunities for
mutually beneficial transactions.

champagnefly512

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The following present select elasticity of demand elasticity of demand estimates: Barnes & Noble books = - 4.00, Coca-Cola = - 1.22, Cigarettes = -0.25, Beer = -0.23, Gasoline = -0.06.

Using the elasticity estimates in the table above, classify the price elasticity demand as elastic or inelastic. Explain your reasoning.

Explain the implications of those classifications on tax revenue collections when the per-unit tax increases as opposed to decreases.

Using those classifications, make some assumptions regarding tax incidence. For instance, will buyers or sellers pay a larger portion of the tax per unit? Explain.

Conclude, based on the elasticity classifications, their effect on tax revenue and tax incidence, and which goods the government would prefer to tax.

ECON 1050 Lecture : Economics-1 (1) (dragged) 3

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