Question

In the US market, the demand and supply for iPhones are given by P=1,000−2Q^D and P=3Q^S+200 respectively, where P is the price, and Q is the quantity of iPhones. With many parts sourced from China, Apple has to pay US government a per unit tax of $50 for iPhones due to recent trade war.

Professor Williams argues that, in theory, the tax on iPhones harms US consumers equally as if the US government put the statutory incidence on the consumers. Is Professor Williams correct? Explain.

Answer 1

Professor is correct

The economic incidence and statutory incidence of tax are different. It does not matter on whom the tax is imposed because the ultimate results remain the same. the economic incidence depends upon the elasticity of demand and supply and therefore, it does not matter whether the tax is paid by the consumer or the producer because they mutually share the tax incidence depending upon the elasticity of demand and supply. In this case, consumers are paying 40% of the tax and producers are saying 60%. This sharing remains unchanged when consumers are required to deposit the tax. This is because there has been no change in the demand and supply elasticity.