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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

Incidence of ad valorem taxes

© Allen C. Goodman 2014

consider demand and supply
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
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
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
Does Q** always equal Q***
  • At least with linear supply and demand curves, yes!

Example

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