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Incidence of ad valorem taxes

Incidence of ad valorem taxes. © Allen C. Goodman 2014. Consider Demand and Supply. Price. Supply Ps = a + b Qs; b > 0 Demand Pd = c + d Qd; d < 0 If we set Ps = Pd , then. Supply. c. Demand. a. Q*. Quantity. Suppose there is an ad valorem tax. Price.

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Incidence of ad valorem taxes

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  1. Incidence of ad valorem taxes © Allen C. Goodman 2014

  2. Consider Demand and Supply Price • Supply Ps = a + b Qs; b > 0 • Demand Pd = c + d Qd; d < 0 If we set Ps = Pd, then Supply c Demand a Q* Quantity

  3. Suppose there is an ad valorem tax Price • Tax parameter is , so if there is a 10% tax,  = (1+tax) = (1+0.10) = 1.1 • Impose on Supplier • Supply – Why? Ps´= a  + b  Qs • Demand Pd = c + d Qd If we set Ps´ = Pd, then Supply c Demand TAX DW aα a Q** Q* Quantity

  4. Suppose there is an ad valorem tax Price • Tax is , so if there is a 10% tax,  = 1.1 • Impose on Demander • Supply Ps = a + b Qs • Demand Pd´ = (c/ ) + (d / ) Qd If we set Ps = Pd´, then Supply c Demand c/α TAX DW a Q*** Q* Quantity

  5. Does Q** always equal Q*** • At least with linear supply and demand curves, yes! Example

  6. If Q** = Q*** • Incidence (producers, consumers) is always the same. • DW Loss is always the same!

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