Economics for your Classroom Ed Dolan’s Econ Blog Who Really Pays Taxes? The Question of Tax Incidence June 21, 2014 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishing.
16
Embed
Who Really Pays Taxes? The Question of Tax Incidence
Who really pays taxes? This sideshow explains why the person who is legally obligated to pay them is not always the person who bears the economic burden
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Economics for your ClassroomEd Dolan’s Econ Blog
Who Really Pays Taxes?The Question of Tax Incidence
June 21, 2014
Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
The elasticity of supply and demand will play an important part in our story
Elasticity means the percentage change in quantity associated with a 1 percent change in price
Notice that in the neighborhood of the equilibrium point, supply is more elastic than demand, that is, a 1 percent change in price would cause a larger percentage change in the quantity supplied than in the quantity demanded
Consumers will continue to move along their demand curve until they reach point E2, where the quantity demanded at the price including tax equals the quantity supplied
In the new equilibrium, the price, including tax, will be $2.80 and the quantity will fall to 8 million gallons per day
The price received by sellers, after the tax is paid, will fall to $1.80
In the new equilibrium, total tax revenue will be $8 million per day, equal to the area of the entire shaded rectangle ABFE
Consumers will bear 80% of the burden ($6.4 million), equal to the blue shaded area ABDC, because the price they pay including tax has gone up by 80 cents
Sellers will bear 20% of the burden ($1.6 million), equal to the tan area CDFE, because the price they receive after the tax is paid goes down by 20 cents
Renters will continue to move along their demand curve until they reach point E2, where the quantity demanded at the price including tax equals the quantity supplied
In the new equilibrium, the rent, including tax, will be $550 and the number of apartments occupied will decrease to 1,600 units
The rental price per month received by owners, after the tax is paid, will fall to $300
In the new equilibrium, total tax collected by the government will be $400,000 per month, equal to the area ABFE
Renters will bear 20% of the burden, or $80,000 per month, equal to the area ABDC, because the price they pay including tax has gone up by $50
Owners will bear 80% of the burden, or $320,000 per month, equal to the area CDFE, because the price they receive after the tax is paid goes down by $200