Question

Prior to the tax, the equilibrium price would be $60 and the equilibrium quantity would be 280. After the tax is imposed, the price received by sellers would be $57. The price paid by buyers would be $72. The quantity sold would be 271. What is the tax incidence?

Answer 1

Tax incidence is the burden of tax divided between buyers and sellers of a good. It can be calculated as a difference between what is the price paid by the consumers and the price received by the sellers.

In the given case, tax incidence is: Price paid by consumers - Price received by sellers

Tax incidence = $72 - $57 = $15

In this, the tax incidence is larger on consumers than on the producers, therefore, the supply will be more elastic and the demand will be inelastic.

The tax incidence on sellers = Equilibrium price - Price received by sellers

= $60 - $57

= $3

The tax incidence on buyers = Price paid by buyers - Equilibrium price

= $72 - $60

= $12