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Incidence of ad valorem taxes. © Allen C. Goodman 2014. Consider Demand and Supply. Price. Supply Ps = a + b Qs; b > 0 Demand Pd = c + d Qd; d < 0 If we set Ps = Pd , then. Supply. c. Demand. a. Q*. Quantity. Suppose there is an ad valorem tax. Price.

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Incidence of ad valorem taxes l.jpg

Incidence of ad valorem taxes

© Allen C. Goodman 2014


Consider demand and supply l.jpg
Consider Demand and Supply

Price

  • Supply

    Ps = a + b Qs; b > 0

  • Demand

    Pd = c + d Qd; d < 0

    If we set Ps = Pd, then

Supply

c

Demand

a

Q*

Quantity


Suppose there is an ad valorem tax l.jpg
Suppose there is an ad valorem tax

Price

  • Tax parameter is , so if there is a 10% tax,  = (1+tax) = (1+0.10) = 1.1

  • Impose on Supplier

  • Supply – Why?

    Ps´= a  + b  Qs

  • Demand

    Pd = c + d Qd

    If we set Ps´ = Pd, then

Supply

c

Demand

TAX

DW

a

Q**

Q*

Quantity


Suppose there is an ad valorem tax4 l.jpg
Suppose there is an ad valorem tax

Price

  • Tax is , so if there is a 10% tax,  = 1.1

  • Impose on Demander

  • Supply

    Ps = a + b Qs

  • Demand

    Pd´ = (c/ ) + (d / ) Qd

    If we set Ps = Pd´, then

Supply

c

Demand

c/α

TAX

DW

a

Q***

Q*

Quantity


Does q always equal q l.jpg
Does Q** always equal Q***

  • At least with linear supply and demand curves, yes!

Example


If q q l.jpg
If Q** = Q***

  • Incidence (producers, consumers) is always the same.

  • DW Loss is always the same!


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