INTRODUCTION
1.1 The concept of elasticity
Elasticity is an economics concept that measures the responsiveness of one variable to changes in another variable. Suppose you drop two items from a second-floor balcony. The first item is a tennis ball. The second item is a brick. Which will bounce higher? Obviously, the tennis ball. We would say that the tennis ball has greater elasticity.
Beggs (2017) wrote that elasticity can take a number of different forms, depending on what cause and effect relationship economists are attempting to assess. Price elasticity of demand, for example, measures the responsiveness of demand to changes in price. Price elasticity of supply, in contrast, measures the responsiveness of quantity supplied to changes in …show more content…
Depending on the circumstance, the burden of tax can fall more on consumers or on producers. In the case of cigarettes, for example, demand is inelastic because cigarettes are an addictive substance and taxes are mainly passed along to consumers in the strain of higher costs. The analysis, or manner, of how the burden of a tax is divided between consumers and producers is called tax incidence.
Tax incidence is the mode in which the tax burden is divided between buyers and sellers. The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is bigger the more inelastic the demand and supply are.
In the tobacco example above, the tax burden falls on the most inelastic side of the marketplace. If demand is more inelastic than supply, consumers bear most of the tax burden. Simply, if supply is more inelastic than demand, sellers bear most of the taxation …show more content…
While consumers may have other vacation choices, sellers can’t easily move their business. By introducing a tax, the government essentially creates a wedge between the price paid by consumers, Pc\text{Pc}PcP, c, and the price received by producers, Pp\text{Pp}PpP, p. In other words, of the total price paid by consumers, part is retained by the sellers and part is paid to the government in the form of a tax. The distance between Pc\text{Pc}PcP, c and Pp\text{Pp}PpP, p is the tax rate. The fresh market price is Pc\text{Pc}PcP, c, but sellers receive only Pp\text{Pp}PpP, p per unit sold since they pay Pc−Pp\text{Pc}-\text{Pp}Pc−PpP, c, minus, P, p to the government. Since a tax can be viewed as raising the monetary values of production, this could as well be exemplified by a leftward shift of the supply curve. The new supply curve would intercept the demand at the new quantity Qt\text{Qt}QtQ, t. For ease, the diagram above omits the shift in the supply
1.1 The concept of elasticity
Elasticity is an economics concept that measures the responsiveness of one variable to changes in another variable. Suppose you drop two items from a second-floor balcony. The first item is a tennis ball. The second item is a brick. Which will bounce higher? Obviously, the tennis ball. We would say that the tennis ball has greater elasticity.
Beggs (2017) wrote that elasticity can take a number of different forms, depending on what cause and effect relationship economists are attempting to assess. Price elasticity of demand, for example, measures the responsiveness of demand to changes in price. Price elasticity of supply, in contrast, measures the responsiveness of quantity supplied to changes in …show more content…
Depending on the circumstance, the burden of tax can fall more on consumers or on producers. In the case of cigarettes, for example, demand is inelastic because cigarettes are an addictive substance and taxes are mainly passed along to consumers in the strain of higher costs. The analysis, or manner, of how the burden of a tax is divided between consumers and producers is called tax incidence.
Tax incidence is the mode in which the tax burden is divided between buyers and sellers. The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is bigger the more inelastic the demand and supply are.
In the tobacco example above, the tax burden falls on the most inelastic side of the marketplace. If demand is more inelastic than supply, consumers bear most of the tax burden. Simply, if supply is more inelastic than demand, sellers bear most of the taxation …show more content…
While consumers may have other vacation choices, sellers can’t easily move their business. By introducing a tax, the government essentially creates a wedge between the price paid by consumers, Pc\text{Pc}PcP, c, and the price received by producers, Pp\text{Pp}PpP, p. In other words, of the total price paid by consumers, part is retained by the sellers and part is paid to the government in the form of a tax. The distance between Pc\text{Pc}PcP, c and Pp\text{Pp}PpP, p is the tax rate. The fresh market price is Pc\text{Pc}PcP, c, but sellers receive only Pp\text{Pp}PpP, p per unit sold since they pay Pc−Pp\text{Pc}-\text{Pp}Pc−PpP, c, minus, P, p to the government. Since a tax can be viewed as raising the monetary values of production, this could as well be exemplified by a leftward shift of the supply curve. The new supply curve would intercept the demand at the new quantity Qt\text{Qt}QtQ, t. For ease, the diagram above omits the shift in the supply