MODULE 14 Flashcards
(13 cards)
And excise tax drives a wedge between the price paid by consumers, and the price received by producers. As a result of this wage, consumers pay more and producers receive less.
The text creates missed opportunities: potential consumers, who would have consumed or discourage from doing so because price increased
This text leads to inefficiency by distorting incentives and creating missed opportunities for mutually beneficial transactions
The incident of an excise tax doesn’t depend on whether consumers or producers officially pay the tax; the outcome is the same
Who really bears the burden of the tax
INCIDENCE of the tax
What determines how the burden of an excise tax is allocated between consumers and producers?
The incidence of an excise tax depends on the price, elasticity of supply and the price elasticity of demand
A low price elasticity of demand means that the quantity demanded changes little in response to a change in price - a feature of a steep demand curve
A high price elasticity of supply means that the quantity supplied changes a lot in response to a change in price - a feature of a relatively flat supply curve
When the price elasticity of demand is low, and the price elasticity of supply is high, the burden of an excise tax falls, mainly on consumers. Why?
A low price elasticity of demand means that consumers have few substitutes, and therefore a little alternative to buying higher priced gasoline
A high price elasticity of supply results from the fact that producers have mini production substitutes for the gasoline (that is, other uses for the crude oil, from which gasoline is refined)
Producers have much greater flexibility in refusing to accept lower prices for their gasoline resulting in the party with the least flexibility, a.k.a. consumers gets stuck, paying most of the tax.
When the price elasticity of demand is high, and the price elasticity of supply is low, the burden of an excise tax falls, mainly on producers
The revenue collected by an excise tax, is equal to the area of the rectangle, whose height is the tax wedge between the supply and demand curves, and whose width is the quantity transacted under the tax
