Question

Assume that the demand function for a particular good is Qd=90-2P and the supply function is...

Assume that the demand function for a particular good is Qd=90-2P and the supply function is Qs= -10+2P. Assume that the market for the particular good was initially the equilibrium (with no taxes, no regulation, etc.). Assume that a tax of $1 is imposed on the sellers of the good. How will the incidence of the tax be distributed between the sellers (producers) and the buyers (consumers) of the good?

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Answer #1

Qd=90-2P
Qs= -10+2P

At equilibrium Qs=Qd
90-2P=-10+2P
100=4P
P=25
Q=-10+2(25)=40

If a tax of $1 is imposed on the sellers the consumers will pay full price but the sellers will receive less, the new supply function will be:

Qs=-10+2(P-1)
Qs=-10+2P-2
Qs=-12+2P
New equilibrium
-12+2P=90-2P
4P=102
P=25.5

The actual price is 25 without taxes but consumers pay 25.5 This means of the $1 tax $0.5 is paid by the consumers and $0.5 is paid by the producers.This means that the incidence of the tax is 50% on both consumers and producers.

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