Question

Say that a tax of $10 per unit is levied on a good and at that tax the equilibrium demand for the good is 1000 units. Now say the tax increases from $10 to $11 per unit, and as a result equilibrium demand for the good falls to 950 units. What (approximately) is the MCF associated with the tax (show your work, and explain the steps you are taking)?

Answer 1

Given: original tax = 10%; original demand = 1000 units

new tax = 11%; new demand = 950 units

Therefore, change in percentage of tax = 10% (1/10 * 100)

change in percentage of demand = 5% (50/ 1000 * 100)

For practical purposes, MCF can be calculated based on tax rates and elasticities of demand or supply. Thus, we calculate excess burden of taxation.

MCF is therefore, is the % change in demand divided by % change in tax

MCF = 5%/ 10% = 0.5

MCF = 0.5