Economics 001 Principles of Microeconomics

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Economics 001Principles of Microeconomics

• Professor Arik Levinson

• Lecture 7
• Tax incidence

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Tax incidence
DN Nominal incidence, or statutory incidence,
is borne by those who physically pay the tax.
It's what the law says.
DN Economic incidence is borne by those who
suffer economic loss as a result of the tax.
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Example A 1.50 cigarette tax --Suppliers bear
the nominal incidence
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Example A 1.50 cigarette tax --Consumers bear
the nominal incidence
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The nominal incidence is irrelevant to the
economic incidence.
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Tax Division andElasticity of Demand

• Two Extremes
• Perfectly inelastic demand--buyer pays
• Example Insulin
• Perfectly elastic demand--seller pays
• Example Pink marker pens

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Sales Tax and the Elasticity of Demand
Price (dollars per dose)
S
2.20
Perfectly Inelastic Demand
2.00
D
100
Quantity (thousands of doses per day)
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Sales Tax and the Elasticity of Demand
S tax
Buyer pays entire tax
Price (dollars per dose)
S
2.20
Perfectly Inelastic Demand
2.00
D
100
Quantity (thousands of doses per day)
9
Sales Tax and the Elasticity of Demand
S
Price (cents per pen)
1.00
Perfectly Elastic Demand
0.90
1 4
Quantity (thousands of marker pens per week)
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Sales Tax and the Elasticity of Demand
S
S tax
Price (cents per pen)
1.00
Perfectly Elastic Demand
Seller pays entire tax
0.90
1 4
Quantity (thousands of marker pens per week)
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Tax Division andElasticity of Demand

• The division of the tax depends upon elasticity.
• The more inelastic the demand, the more the buyer
  pays.
• The more elastic the demand, the more the seller
  pays.

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Tax Division andElasticity of Supply

• Two Extremes
• Perfectly inelastic supply seller pays
• Example water from a mineral spring
• Perfectly elastic supply buyer pays
• Example sand used to make silicon used by
  computer chip makers

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Sales Tax and theElasticity of Supply
S
Price (dollars per bottle)
50
Perfectly Inelastic Supply
45
D
100
Quantity (thousands of bottles per week)
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Sales Tax and theElasticity of Supply
S
Price (dollars per bottle)
50
Perfectly Inelastic Supply
Seller pays entire tax
45
D
100
Quantity (thousands of bottles per week)
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Sales Tax and theElasticity of Supply
Perfectly Elastic Supply
Price (cents per pound)
11
10
S
D
3 5
Quantity (thousands of pounds per week)
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Sales Tax and theElasticity of Supply
Perfectly Elastic Supply
Price (cents per pound)
11
S tax
buyer pays entire tax
10
S
D
3 5
Quantity (thousands of pounds per week)
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Tax Division andElasticity of Supply

• The division of the tax depends upon elasticity.
• The more inelastic the supply, the more the
  seller pays.
• The more elastic the supply, the more the buyer
  pays.

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Tax incidence in sum...
Demand more elastic than supply
Demand less elastic than supply
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Deadweight Loss
DN Deadweight Loss of a Tax Social Costs
above and beyond Tax revenue
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Deadweight Loss