A tax wedge and who bears it
| English | 中文 | Pinyin |
|---|---|---|
| specific tax/spəˈsɪfɪk tæks/ | 从量税 | cóng liàng shuì |
| tax incidence/tæks ˈɪnsɪdəns/ | 税负归宿 | shuì fù guī sù |
A decision you can investigate
- A tax is legally collected from sellers, but buyers can still pay part of its economic burden.
- Legal responsibility for remitting the tax does not settle who bears the price change.
Build the explanation
- A specific tax 从量税 creates a wedge: buyer price Pb minus seller receipt Ps equals tax t. Demand depends on Pb; supply on Ps. Government receipts are t times the quantity actually traded after the tax.
- Relative elasticities determine the price burden in the competitive model. The less responsive side tends to bear more because it has fewer effective ways to leave or adjust. An ad-valorem tax instead changes the cash wedge with taxable value; use its stated tax base.
Work through the evidence
- Initially Qd=120−2P and Qs=2P give P=30,Q=60. With tax 12, Pb=Ps+12. Solve 120−2(Ps+12)=2Ps: Ps=24, Pb=36 and Q=48.
- Buyers pay 6 more per unit; sellers receive 6 less. Government revenue = 12 × 48 = 576, not 12 × 60. CS=½ × (60−36) × 48=576; PS=½ × 24 × 48=576. Including revenue gives 1728 versus initial gains of 1800: the lost trades create loss 72 here, assuming no externality correction.
What is the seller’s post-tax receipt per unit?
Use the seller price in supply and Pb=Ps+12.
What is post-tax revenue?
12 × 48 = 576.
A tax legally remitted by sellers must be borne entirely by sellers.
Market-price adjustment can transfer part of the burden to buyers.
Test the limits
- The equal split comes from this symmetric model, not a universal tax rule. With relatively inelastic demand, buyers tend to bear more; with relatively inelastic supply, sellers tend to bear more. Perfectly inelastic supply is an extreme case of seller burden when demand is otherwise responsive.
- A tax can improve social allocation when it corrects an external cost; this no-externality arithmetic cannot establish that all taxes reduce welfare. Administration, evasion, revenue use and distribution also matter.
Which side normally bears more when its response is relatively inelastic?
Limited adjustment raises the economic burden on that side.
Apply and explain your answer
- Why is government revenue calculated on 48 units rather than 60?
- Only the post-tax traded quantity is taxed under the stated per-unit rule.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- tax incidence 税负归宿: The distribution of the economic burden of a tax.
- specific tax: A fixed tax amount per unit of a good.
Initially Qd=120−2P and Qs=2P give P=30,Q=60. With tax 12, Pb=Ps+12. Solve 120−2(Ps+12)=2Ps: Ps=24, Pb=36 and Q=48. Buyers pay 6 more per unit; sellers receive 6 less. Government revenue = 12 × 48 = 576, not 12 × 60. CS=½ × (60−36) × 48=576; PS=½ × 24 × 48=576. Including revenue gives 1728 versus initial gains of 1800: the lost trades create loss 72 here, assuming no externality correction.
The equal split comes from this symmetric model, not a universal tax rule. With relatively inelastic demand, buyers tend to bear more; with relatively inelastic supply, sellers tend to bear more. Perfectly inelastic supply is an extreme case of seller burden when demand is otherwise responsive. A tax can improve social allocation when it corrects an external cost; this no-externality arithmetic cannot establish that all taxes reduce welfare. Administration, evasion, revenue use and distribution also matter.
A specific tax creates a wedge: buyer price Pb minus seller receipt Ps equals tax t. Demand depends on Pb; supply on Ps. Government receipts are t times the quantity actually traded after the tax.