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Economics explained

Category:

microeconomic policies

Incidence of tax

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.

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