MYTUTOR SUBJECT ANSWERS

2022 views

Tax incidence: how is a tax borne between consumers and producers?

A tax imposed on a good will affect the supply curve of that good, since it artificially increases the cost of manfacturing that good. Therefore, the supply curve will shift left. This will push the price up. We need to determine how much of that price increase will be felt by the consumer and how much will be "absorbed" by the supplier.

We can determine this by looking at the demand curve:

The burden of the tax depends overall on the elasticity of the demand curve. The more inelastic the demand curve, the more of the tax will be borne by the consumer.

This is intuitive; remember that an inelastic good is one which the consumer is largely indifferent to price changes - they will continue to purchase their chosen quantity of the good, despite price changes. A tax is a form of price change.

Diagrammatically:

(Diagrams from Tutor2U)

The price increase is borne by consumers and the rest of the tax (the gap between the supply curves) is borne by the producer.

 

For an elastic good, i.e. a good with quite a flat demand curve, we can see that the resulting consumer price: P1 to P2 is much smaller than the tax. Thus, the producer has absorbed a lot of the tax. It's worth noting that the fall in demand is still quite large.

For an inelastic good, the consumer price change is much larger: P1-P2.

.

 

Alex H. A Level Economics tutor, GCSE Economics tutor

3 years ago

Answered by Alex, an A Level Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

64 SUBJECT SPECIALISTS

£22 /hr

Zhiqi (Amy) S.

Degree: Economics (Bachelors) - LSE University

Subjects offered:Economics, Science+ 4 more

Economics
Science
Maths
Mandarin
Chemistry
-Personal Statements-

“Hello parents & students! I am a second year Economics student at the LSE and firmly believe that the pursuit of education requires hard work and effort.”

MyTutor guarantee

£20 /hr

Ruth N.

Degree: Economics (Bachelors) - Cambridge University

Subjects offered:Economics, Maths+ 2 more

Economics
Maths
-Personal Statements-
-Oxbridge Preparation-

“Economics Graduate from Cambridge, wanting to share my passion for the discipline”

MyTutor guarantee

£20 /hr

Thomas B.

Degree: Economics (Bachelors) - Nottingham University

Subjects offered:Economics, Maths+ 3 more

Economics
Maths
Graphic Design
Extended Project Qualification
English

“Economics Undergraduate at the University of Nottingham. Looking to help make a difference!”

MyTutor guarantee

About the author

PremiumAlex H. A Level Economics tutor, GCSE Economics tutor

Alex H.

Currently unavailable: for regular students

Degree: Economics (Bachelors) - Durham University

Subjects offered:Economics

Economics

“Top tutor from the renowned Russell university group, ready to help you improve your grades.”

You may also like...

Other A Level Economics questions

Explain how The Monetary Policy Committee controls inflation within the UK economy.

Evaluate the view that attempts by governments to eliminate market failure by intervening in markets for public goods and merits goods will inevitably lead to government failure.

Explain why monopolies may be an undesirable form of market structure

Why does the demand curve slope downwards?

View A Level Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok