Authors libby rittenberg 815
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Figure 15.7 Tax Incidence in the Model of Demand and Supply
Suppose the market price of beef is $3 per pound; the equilibrium
quantity is 3 million pounds per day. Now suppose an excise tax of $2
per pound is imposed, shown by the vertical green line. We insert this
tax wedge between the demand and supply curves. It raises the market
price to $4 per pound, suggesting that buyers pay half the tax in the
form of a higher price. Sellers receive a price of $2 per pound; they pay
half the tax by receiving a lower price. The equilibrium quantity falls to
2 million pounds per day.
We insert our tax “wedge” between the demand and supply curves. In our
example, the price paid by buyers rises to $4 per pound. The price received
by sellers falls to $2 per pound; the other $2 goes to the government. The
quantity of beef demanded and supplied falls to 2 million pounds per day.
In this case, we conclude that buyers bear half the burden of the tax (the
price they pay rises by $1 per pound), and sellers bear the other half (the
price they receive falls by $1 per pound). In addition to the change in price,
a further burden of the tax results from the reduction in consumer and in
producer surplus. We have not shown this reduction in the graph.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
815
