Economic effects of taxes

The economic effects of taxes

Consider the contrast between relatively inelastic and relatively elastic demand:

Relatively inelastic demand	Relatively elastic demand

Diagrammatic results:

	Lefthand diagram	Righthand diagram
1. the new equilibrium quantity (Qt)	5
2. the new price to buyers, including taxes:	7
3. the new price received by sellers, after taxes:	3
4. the change in consumer surplus (loss = AC)	-16.5
5. the change in producer surplus (loss = BD)	-5.5
6. the tax revenues collected by the government (AB)	+20
7. the welfare loss (deadweight loss) to society (CD)	-2
8. percentage of tax paid by buyers	75%
9. percentage of tax paid by sellers	25%

   Note 1: It is not government laws but the laws of supply and demand which determine who ultimately pays a tax.
   Note 2: Buyers tend to pay more of a tax when demand is inelastic compared to supply, and sellers tend to pay more of a tax when demand is elastic compared to supply.
   Note 3: Since it is only the size of a tax which matters and not who is formally assessed it, you can show any tax any way you please: you can simply insert a "wedge" equal to the size of the tax between supply and demand, or shift supply up or shift demand down by the amount of the tax. By convention, most economists shift supply up, but feel free to do whatever makes most sense to you.