Tax Burden

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Tax Burden Elasticity
The Relationship Between

• DSP(4) Market Intervention

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when the demand is elastic.
This condition is NOT clear enough !
when the demand is more elastic than the supply.
OR when the elasticity of demand is larger than
the elasticity of supply.
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when the demand is less elastic than the supply.
OR when the elasticity of demand is smaller
than the elasticity of supply.
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The larger the elasticity, the smaller the tax
burden, and vice versa.
Under what condition both consumers and
sellers would bear the SAME amount of tax burden?
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3. If the demand is perfectly elastic
Per-unit tax ? S decreases (S curve shifts up) ?
P remains unchanged and Q decreases
Sellers will bear the whole tax burden while
consumers will bear nothing.
P2
P1
Sellers tax burden
Tax revenue
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4. If the demand is perfectly inelastic
Per-unit tax ? S decreases (S curve shifts up) ?
P increases and Q remains unchanged
Consumers will bear the whole tax burden while
sellers will bear nothing.
Consumers tax burden
Tax revenue
Q1
Q2
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5. If the supply is perfectly elastic
Per-unit tax ? S decreases (S curve shifts up) ?
P increases and Q decreases
Consumers will bear the whole tax burden while
sellers will bear nothing.
P2
Consumers tax burden
Tax revenue
P1
Q1
Q2
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6. If the supply is perfectly inelastic
Per-unit tax ? S decreases (S curve shifts up) ?
both P and Q remain unchanged
S1
S2
Sellers will bear the whole tax burden while
consumers will bear nothing.
P1
Sellers tax burden
Tax revenue
Q1
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When the government imposes sales tax on sellers,
generally the price will rise and the quantity
will fall both consumers and sellers will bear
different amount of tax burdens.
IS IT DIFFICULT?
The government may provide subsidy to sellers in
order to encourage them to produce more.