Elasticity and tax revenue

0
11كيلو بايت

Key points

  • Tax incidence is the manner in which the tax burden is divided between buyers and sellers.
  • The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.
  • Tax revenue is larger the more inelastic the demand and supply are.

The burden of tax

Depending on the circumstance, the burden of tax can fall more on consumers or on producers.
In the case of cigarettes, for example, demand is inelastic—because cigarettes are an addictive substance—and taxes are mainly passed along to consumers in the form of higher prices.
The analysis, or manner, of how the burden of a tax is divided between consumers and producers is called tax incidence.

Elasticity and tax incidence

Typically, the incidence, or burden, of a tax falls both on the consumers and producers of the taxed good. But if we want to predict which group will bear most of the burden, all we need to do is examine the elasticity of demand and supply.
In the tobacco example above, the tax burden falls on the most inelastic side of the market. If demand is more inelastic than supply, consumers bear most of the tax burden. But, if supply is more inelastic than demand, sellers bear most of the tax burden.
Think about it this way—when the demand is inelastic, consumers are not very responsive to price changes, and the quantity demanded remains relatively constant when the tax is introduced. In the case of smoking, the demand is inelastic because consumers are addicted to the product. The seller can then pass the tax burden along to consumers in the form of higher prices without much of a decline in the equilibrium quantity.
When a tax is introduced in a market with an inelastic supply—such as, for example, beachfront hotels—sellers have no choice but to accept lower prices for their business. Taxes do not greatly affect the equilibrium quantity. The tax burden in this case is on the sellers. If the supply were elastic and sellers had the possibility of reorganizing their businesses to avoid supplying the taxed good, the tax burden on the sellers would be much smaller, and the tax would result in a much lower quantity sold instead of lower prices received. 
People often think that excise taxes hurt mainly the specific industries they target. But ultimately, whether the tax burden falls mostly on the industry or on the consumers depends simply on the elasticity of demand and supply.

Review question

Under which circumstances does the tax burden fall entirely on consumers?
البحث
الأقسام
إقرأ المزيد
Mental Health
Autism Spectrum: Misdiagnosis
There is a significant level of misdiagnosis of autism in neurodevelopmentally typical children;...
بواسطة Kelsey Rodriguez 2023-03-09 16:07:13 0 8كيلو بايت
Financial Services
Decisions within a budget constraint
Key points The budget constraint is the boundary of the opportunity...
بواسطة Mark Lorenzo 2023-07-12 20:28:58 0 10كيلو بايت
Business
What role does storytelling play in a business biography?
torytelling is one of the most powerful tools in writing a business biography. A well-crafted...
بواسطة Dacey Rankins 2025-01-08 13:58:22 0 7كيلو بايت
Guns
Exploring the Recreational Side of Firearms: More than Just Shooting
Exploring the Recreational Side of Firearms: More than Just Shooting Introduction: Firearms have...
بواسطة Leonard Pokrovski 2024-05-09 09:56:54 0 14كيلو بايت
Arts, Culture and Entertainment
Sound of Metal (2020)
Keeping at bay his inner demons by devoting himself to art, metal drummer, Ruben, has been living...
بواسطة Leonard Pokrovski 2022-09-29 18:38:27 0 25كيلو بايت
image/svg+xml


BigMoney.VIP Powered by Hosting Pokrov