| Jim Whitney | Economics 102 |
By convention, we usually show a tax as shifting the supply curve up
by the amount of the tax and show a subsidy as shifting the supply curve
down by the amount of the subsidy. These are shown in the two lefthand
diagrams below. It is important to keep in mind that the only purpose
of the shifted curve is to help us quickly find the new equilibrium quantity.
True MB and MC have not changed, so we use the original D and S curves
to plot the new Pb and Ps at the the new Qt.
Sometimes we (and some authors) distinguish between policies imposed
on buyers (consumption policies) and sellers (production policies). The
differences are shown across each row of diagrams below. Note the bottomline,
simplifying lesson: only the total size of a tax or subsidy matters;
market forces, not policymakers, determine who actually pays a tax and
gets a subsidy.
Three ways of legislating a $6 tax:
Three ways of legislating a $6 subsidy:
