Tax on Producers’ Side Story DEMAND: Q=100-P, SUPPLY: Q=P, Tax : 4$ on sellers RECIPE

1. P S 100 S’ a $52 j b i h $50 g k c l $48 d e f m D Q 50 48 100 Tax on Producers’ Side Story DEMAND: Q=100-P, SUPPLY: Q=P, Tax : 4$ on sellers RECIPE 1) Put PRICE on the LHS. (i.e. SUPPLY: P=Q) 2) ADD the amount of tax to the intercept term. (i.e. SUPPLY: P=Q+4) 3) Then the new intersection price means the price paid by consumers($52) 4) CS is embodied by the area, ‘below the demand curve and above the price paid by consumers’. 5) The net price received by producers is the price paid by consumers – tax = $52 -$4 = $48 6) PS is embodied by the area, ‘above the supply curve and below the net price received by producers’. 7) The government revenue is the new equilibrium quantity times tax. After taxation C.S.: a P.S.: d+e G.R.: b+c+g+h Sub total: a+b+c+d+e+g+h There is deadweight loss of (i+k) . Before taxation C.S.: a+b+h+i P.S.: c+d+e+g+k Sub total: a+b+c+d+e+g+h+i+k

2. P S a b $52 c f i $50 g j d $48 k e h l D’ D Q Tax on Consumers’ Side Story DEMAND: Q=100-P, SUPPLY: Q=P, Tax : 4$ on consumers RECIPE 1) Put PRICE on the LHS. (i.e. DEMAND: P=100-Q) 2) Subtract the amount of tax from the intercept term. (i.e. SUPPLY: P=100-4+Q => P=96+Q) 3) Then the new intersection price means the net price received by producers($48) 4) PS is embodied by the area, ‘above the supply curve and below the net price received by producers’. 5) The price paid by consumers is the price paid by consumers + tax = $48 +$4 = $52 6) CS is embodied by the area, ‘below the demand curve and above the price paid by consumers’. 7) The government revenue is the new equilibrium quantity times tax. After taxation C.S.: a+b P.S.: e G.R.: c+d+f+g Sub total: a+b+c+d+e+f+g There is deadweight loss of (i+j) . Before taxation C.S.: a+b+c+f+i P.S.: d+e+g+j Sub total: a+b+c+d+e+f+g+i+j

3. P P S 100 S’ S a a b $52 $52 j b i c h f i $50 $50 g k c g j l d $48 $48 k d e e f m h l D D’ D Q 50 48 100 Q Tax on producers’ side Tax on consumers’ side In both cases, Before tax After tax CS: 0.5 X 50 X 50 CS: 0.5 X 48 X 48 PS: 0.5 X 50 X 50 PS: 0.5 X 48 X 48 GR: 0 GR: 4 X 48 DWL: 0 DWL: 0.5 X 4 X 2 There is no difference in outcome whether the government impose the excise tax on consumers or producers. But, the new intersection points have different meanings. The price paid by consumers vs the price received by producers

4. NO! If there is an perfectly inelastic party (consumers or producers), then there is no DWL. As you see, DWL usually looks like a triangle. For the area of triangle to be greater than zero, it needs positive height and positive base. But if one party is perfectly inelastic (one curve is just a vertical line), then there is no positive base, even though the government impose an excise tax. In other words, no changes in quantity, no DWL !! P P S’ S D S D’ D Q Q IF the government impose any tax, then can we say that there always exists DWL?