In the graph above, the market is in equilibrium when the price is at $6. Now suppose that
the government charges a tax of $3 per unit on this product. You can decide whether it
should be paid by producers or consumers but before you draw a new supply curve or
demand curve on the graph, look at the curves an try to answer in your mind how the tax
incidence will be allocated. In other words, who will ultimately pay a larger share of the $3
tax per unit, the consumer or producer. Now check that by adding a new supply curve or
a new demand curve that incorporates the tax.
Calculate
1) the new price that consumers will pay including tax
2) the difference between the amount that consumers used to pay and what they now
have to pay
3) the new amount that producers will receive for each unit after taxes have been paid
4) the difference between the amount that producers used to receive per unit and what
they receive per unit after the tax has been paid.
We’re you able to determine how the burden of tax was going to be allocated by looking
at the relative slope of the curves (just reflect, you don’t need to answer here).
Also Calculate (after the tax has been imposed)
5) The consumer surplus
6) the producer surplus
7) the tax revenue
8) the deadweight loss
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The new price that consumers will pay including tax is $9.
The difference between the amount that consumers used to pay and what they now have to pay is $3.
The new amount that producers will receive for each unit after taxes have been paid is $6.
The difference between the amount that producers used to receive per unit and what they receive per unit after the tax has been paid is $3.
The burden of the tax will be allocated to both consumers and producers, but the exact share will depend on the relative elasticities of demand and supply. In this case, the demand curve is relatively inelastic, while the supply curve is relatively elastic. This means that consumers will bear a larger share of the tax burden than producers.
Here are the calculations for consumer surplus, producer surplus, tax revenue, and deadweight loss:
Consumer surplus is the area below the demand curve and above the market price. Before the tax, consumer surplus was $18. After the tax, consumer surplus is $12. Therefore, the tax has reduced consumer surplus by $6.
Producer surplus is the area above the supply curve and below the market price. Before the tax, producer surplus was $12. After the tax, producer surplus is $9. Therefore, the tax has reduced producer surplus by $3.
Tax revenue is the amount of money that the government collects from the tax. In this case, the tax rate is $3 per unit, and the quantity of output sold is 10 units. Therefore, the tax revenue is $30.
Deadweight loss is the loss of economic efficiency that results from the tax. It is the area of the triangle between the demand curve, the supply curve, and the market price after the tax has been imposed. In this case, the deadweight loss is $6.
The relative slopes of the demand and supply curves can be used to determine how the burden of a tax will be allocated. In general, if the demand curve is relatively inelastic, then consumers will bear a larger share of the tax burden. This is because an inelastic demand curve means that consumers are not very responsive to changes in price. As a result, they will continue to buy the same quantity of the good even if the price increases. This means that the producers can pass on most of the tax burden to consumers in the form of higher prices.
Conversely, if the supply curve is relatively inelastic, then producers will bear a larger share of the tax burden. This is because an inelastic supply curve means that producers are not very responsive to changes in price. As a result, they will continue to produce the same quantity of the good even if the price decreases. This means that consumers will have to bear most of the tax burden in the form of lower prices.
