Question

Calculating tax incidence Suppose that the local government of Jacksonville decides to institute a tax on cider consumers. Before the tax, 35,000 cases of cider were sold every week at a price of the consumer?

Answer 1

Tax incidence involves analyzing who bears the burden of a tax between consumers and producers, which is determined by examining the elasticity of demand and supply.

Taxes on inelastic goods, like cigarettes, tend to pass along to consumers in the form of higher prices. Elasticity affects the likelihood of quantity reductions and the tax revenue generated.

Step-by-step explanation:

The concept of tax incidence refers to how the burden of a tax is divided between consumers and producers in a market.

It is closely linked to the elasticity of demand and supply. When demand is inelastic, as in the case of cigarette taxes, the burden of the tax falls largely on consumers, leading to higher prices without significantly decreasing the equilibrium quantity.

A tax incidence can be calculated by determining the difference between the price consumers pay after the tax is introduced and the initial equilibrium price, as well as the difference between the initial equilibrium price and the price producers receive after the tax is implemented.

In a scenario where either demand or supply is elastic, there is a greater likelihood that the affected side will reduce quantity sold or purchased rather than absorb the cost of the tax.

This is essential for predicting who will bear most of the burden and whether a tax will generate substantial revenue. A market with high elasticity on both sides will typically yield lower tax revenue from an excise tax.