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Incidence of ad valorem taxes - PowerPoint PPT Presentation

Incidence of ad valorem taxes. © Allen C. Goodman 2014. Consider Demand and Supply. Price. Supply Ps = a + b Qs; b &gt; 0 Demand Pd = c + d Qd; d &lt; 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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Presentation Transcript

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

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

Example

If Q** = Q***
• Incidence (producers, consumers) is always the same.
• DW Loss is always the same!