Authors libby rittenberg 814
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These questions relate to tax incidence analysis, a type of economic
analysis that seeks to determine where the actual burden of a tax rests.
Does the burden fall on consumers, workers, owners of capital, owners of
natural resources, or owners of other assets in the economy? When a tax
imposed on a good or service increases the price by the amount of the tax,
the burden of the tax falls on consumers. If instead it lowers wages or
lowers prices for some of the other factors of production used in the
production of the good or service taxed, the burden of the tax falls on
owners of these factors. If the tax does not change the product’s price or
factor prices, the burden falls on the owner of the firm—the owner of
capital. If prices adjust by a fraction of the tax, the burden is shared.
Figure 15.7 "Tax Incidence in the Model of Demand and Supply" gives an
example of tax incidence analysis. Suppose D1 and S1 are the demand and
supply curves for beef. The equilibrium price is $3 per pound; the
equilibrium quantity is 3 million pounds of beef per day. Now suppose an
excise tax of $2 per pound of beef is imposed. It does not matter whether
the tax is levied on buyers or on sellers of beef; the important thing to see
is that the tax drives a $2 per pound “wedge” between the price buyers pay
and the price sellers receive. This tax is shown as the vertical green line in
the exhibit; its height is $2.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
814
