Economics explained
Category:
microeconomic policies
Incidence of tax
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Incidence of tax
Incidence of tax is the distribution of the burden of tax between sellers and buyers.
Diagram 1 : Incidence of tax
Following the imposition of a tax, the market price is higher at P1 than at the equilibrium price Pe
The quantity traded is less at Q1 rather than at the equilibrium quantity Qe
Consumers and producers share the burden of the tax.
Total shaded area
The total tax revenue for the government is shown by the total shaded area ( blue + pink) .
Blue Area - Consumers share
The incidence on the consumer is the distance Pe to P1 multiplied by the new quantity sold Q1
Consumers pay to the extent that price rises.
Pink Area - Producers share
The incidence on the producer is the distance Pe to P2 multiplied by the new quantity sold Q1
Producers pay to the extent that this rise in price is not sufficient to cover the tax.