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Tax Incidence and Own-Price Elasticities Around p = p* the own-price elasticityof demand is approximately Tax Incidence and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* $t pb qt ps Change to sellers’price is ps - p*. Change to quantitydemanded is Dq. Dq Tax Incidence and Own-Price Elasticities Around p = p* the own-price elasticityof supply is approximately Tax Incidence and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* pb pb qt pb ps Tax paid by buyers Tax paid by sellers Tax incidence = Tax Incidence and Own-Price Elasticities Tax incidence = So Tax Incidence and Own-Price Elasticities Tax incidence is The fraction of a $t quantity tax paidby buyers rises as supply becomes moreown-price elastic or as demand becomesless own-price elastic. Tax Incidence and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply ps= p* $t pb qt = q* As market demandbecomes less own- price elastic, tax incidence shifts moreto the buyers. When eD = 0, buyers pay the entire tax, even though it is levied on the sellers. Deadweight Loss and Own-Price Elasticities A quantity tax imposed on a competitive market reduces the quantity traded and so reduces gains-to-trade (i.e. the sum of Consumers’ and Producers’ Surpluses). The lost total surplus is the tax’s deadweight loss, or excess burden. Deadweight Loss and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* No tax Deadweight Loss and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* No tax CS PS Deadweight Loss and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* $t pb qt ps CS PS The tax reducesboth CS and PS,transfers surplusto government Tax Deadweight Loss and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* $t pb qt ps CS PS Tax Deadweight loss Deadweight Loss and Own-Price Elasticities p D(p), S(p) Marketdemand Marketsupply p* q* $t pb qt ps Deadweight loss falls as marke