Incidence of Taxation - How to Graph It

Summary

In this educational video, Mr. Peter explores the concept of tax incidence, explaining how the burden of an excise tax is shared between consumers and producers. He uses diagrams to illustrate how the imposition of a per-unit tax shifts the supply curve and affects market price and quantity. The video delves into how tax burden distribution is influenced by the elasticity of supply and demand, showing that inelastic demand leads to consumers bearing more of the tax burden, while elastic supply results in producers bearing more. The analysis includes the impact of taxation on total revenue, efficiency loss, and deadweight loss, providing a comprehensive understanding of tax incidence in various economic scenarios.

Takeaways

• 📚 The concept of 'incidents of taxation' refers to the burden of taxation, indicating how much of a tax is paid by consumers and how much by producers.
• 💼 In most cases, producers collect the tax and then pass the proceeds onto the government, which often results in a shift of the supply curve due to the tax imposition.
• 📉 The market quantity typically decreases after a per-unit tax is imposed, reflecting a reduction in the quantity demanded and supplied at the new market price.
• 💸 The tax burden is shared between consumers and producers, with the exact division depending on the relative elasticities of supply and demand.
• 🟥 In scenarios with inelastic demand, consumers bear a larger share of the tax burden because they are less responsive to price changes.
• 🟦 With elastic demand, producers bear more of the tax burden as consumers can more easily adjust their purchasing behavior in response to price increases.
• 🔄 The incidence of taxation is inversely related to the elasticity of supply; with inelastic supply, producers bear more of the tax burden, while with elastic supply, consumers bear more.
• 📊 The diagrammatic analysis shows that the tax burden (incidence of taxation) can be visualized as areas on a graph, with different shapes indicating the burden on consumers and producers.
• 💰 The imposition of a tax generally leads to a decrease in total revenue for the firm, as sales volume drops and the producer's net price per unit is reduced.
• ⏺ The video concludes with the importance of understanding how elasticity impacts the incidence of taxation, with different outcomes depending on whether demand or supply is more elastic.

Q & A

What is meant by the 'incidence of taxation'?

The incidence of taxation refers to the burden of taxation, specifically how much of a tax is paid by consumers and how much is paid by producers.

How does a per unit tax affect the supply curve?

A per unit tax causes the supply curve to shift upwards by the vertical distance of the tax, increasing the price of each unit sold.

What happens to market price and quantity when a per unit tax is imposed?

The imposition of a per unit tax results in a new market price (higher) and a new market quantity (lower) due to the increased cost passed on to consumers and producers.

How is the tax burden shared between producers and consumers?

The tax burden is shared between producers and consumers, with each bearing a portion of the tax depending on the elasticity of supply and demand. Neither party usually bears the full tax burden unless there is perfect elasticity or inelasticity.

What is the significance of the vertical distance between the supply curve and the new supply curve (S + tax)?

The vertical distance between the supply curve and the new supply curve (S + tax) represents the per unit amount of the tax.

How does inelastic demand affect the tax burden?

With inelastic demand, consumers bear most of the tax burden because they cannot easily change their buying behavior in response to price increases.

What happens to producer revenue after a per unit tax is imposed?

Producer revenue typically decreases after a per unit tax is imposed, as both the market price and quantity sold are affected by the tax, resulting in a smaller revenue box.

What is deadweight loss in the context of taxation?

Deadweight loss refers to the loss of efficiency in the market due to the tax, as it reduces consumer surplus and producer surplus, creating an overall loss for society.

How does elastic demand impact the distribution of the tax burden?

With elastic demand, producers bear more of the tax burden because consumers are more sensitive to price changes and can reduce their consumption or switch to substitutes.

What is the relationship between tax incidence and elasticity?

The incidence of taxation is closely related to elasticity. If demand or supply is inelastic, the tax burden falls more on consumers or producers, respectively. Conversely, if demand or supply is elastic, the tax burden shifts more to the other party.

Outlines

00:00

💼 Introduction to Tax Incidence and Elasticity

This paragraph introduces the concept of tax incidence, which refers to the distribution of the burden of a tax between consumers and producers. It explains that when a per-unit tax is imposed, the market price increases, and the supply curve shifts upwards by the amount of the tax. The new market price and quantity are determined by the intersection of the new supply curve and the demand curve. The paragraph also discusses how the tax burden is shared between consumers and producers, and how the incidence of taxation can be visualized through changes in market price and quantity. The analysis shows that the tax burden is not solely borne by consumers but is also shared with producers, leading to a decrease in total revenue for the firm and a deadweight loss to society.

05:01

📊 Analyzing Tax Burden and Efficiency Loss

The second paragraph delves deeper into the analysis of tax burden and efficiency loss. It explains how to calculate the tax burden on consumers and producers by comparing the market price before and after the tax imposition. The paragraph illustrates the concept using a diagram, where the tax burden on consumers is represented by a rectangular area, and the burden on producers is shown by a shaded area. The paragraph also discusses the impact of taxation on total revenue and the emergence of a deadweight loss due to the tax, which is represented by a triangular area. The analysis highlights the relationship between tax incidence and elasticity, setting the stage for exploring different scenarios of supply and demand elasticity in the subsequent paragraphs.

10:01

📉 Impact of Elasticity on Tax Incidence

The final paragraph explores how the elasticity of supply and demand affects the incidence of taxation. It presents different scenarios based on the elasticity of demand and supply. In the case of inelastic demand, consumers bear most of the tax burden because they cannot easily change their purchasing patterns. Conversely, with elastic demand, producers bear more of the tax burden as consumers can easily substitute the taxed good or service. The paragraph also discusses the cases of inelastic and elastic supply, explaining how producers' ability to change production levels in response to the tax affects the distribution of the tax burden. The analysis concludes with a summary of the key takeaways, emphasizing the importance of understanding the relationship between tax incidence and elasticity.

Keywords

💡Incidents of Taxation

Incidents of Taxation refers to the distribution of the burden of a tax between the buyer and the seller in a market. It is a key concept in the video, as it explores how the imposition of a tax impacts different parties in an economic transaction. The video explains that unless there is perfect elasticity in supply or demand, the tax burden is shared between the producer and the consumer. This concept is central to understanding the economic effects of taxation policies.

💡Elasticity

Elasticity in economics measures how sensitive the quantity demanded or supplied of a good is to a change in price. The video discusses how the elasticity of supply and demand influences the incidence of taxation. For instance, inelastic demand means consumers are less responsive to price changes, and thus they bear more of the tax burden, as seen in the video's analysis of a steep demand curve where the tax impact is largely passed onto consumers.

💡Excise Tax

An excise tax is a per-unit tax levied on specific goods, and it is a focal point in the video's discussion. The script explains that when an excise tax is imposed, it effectively increases the price of each unit available for sale, leading to a shift in the supply curve. This shift, as depicted in the video, results in a new market equilibrium where both the price and quantity traded are affected.

💡Supply Curve

The supply curve represents the quantity of a good that producers are willing to supply at various prices. In the context of the video, the imposition of a tax causes the supply curve to shift upwards by the amount of the tax, reflecting the increased cost to producers. This shift is used to illustrate how the tax affects the market price and quantity, and subsequently, the burden shared between consumers and producers.

💡Demand Curve

The demand curve illustrates the quantity of a good that consumers are willing to purchase at various prices. The video uses the demand curve to show how a tax affects consumer behavior. When a tax is imposed, the video explains that the demand curve appears to shift, reflecting a new market price and quantity. This shift is crucial for understanding how consumers bear part of the tax burden.

💡Market Price and Quantity

The market price and quantity are the equilibrium price and quantity in a market, which are affected by the supply and demand conditions. The video script describes how the imposition of a tax leads to a new market price (P2) and quantity (Q2), indicating a change in the market equilibrium. This change is a direct result of the tax burden being shared between consumers and producers.

💡Tax Burden

Tax burden refers to the financial impact of a tax on economic agents, such as consumers and producers. The video script discusses how the tax burden is distributed between consumers and producers depending on the elasticity of supply and demand. The video uses diagrams to show the areas representing the tax burden borne by consumers and producers, highlighting the shared nature of this burden.

💡Producer Surplus and Consumer Surplus

Producer surplus is the difference between the price at which a producer is willing to sell a good and the actual price received, while consumer surplus is the difference between what consumers are willing to pay and the actual price they pay. The video script mentions these concepts in the context of deadweight loss, where the imposition of a tax reduces both producer and consumer surplus, leading to an efficiency loss in the market.

💡Deadweight Loss

Deadweight loss, also known as efficiency loss, occurs when a market tax leads to a reduction in total surplus that is not captured by any economic agent. The video explains that the imposition of a tax results in deadweight loss, as seen in the triangular area ABC of the diagrams. This loss represents the inefficiency introduced into the market due to the tax.

💡Inelastic and Elastic Demand and Supply

Inelastic demand and supply refer to situations where the quantity demanded or supplied does not significantly change in response to price changes, while elastic demand and supply indicate a higher sensitivity to price changes. The video script uses these concepts to explain how the incidence of taxation varies with different elasticities. For example, with inelastic demand, consumers bear more of the tax burden, whereas with elastic supply, producers bear more of the tax burden.

Highlights

Incidents of Taxation refers to the burden of taxation shared between consumers and producers.

Elasticity of supply and demand plays a crucial role in determining the incidence of taxation.

When a per unit tax is imposed, it typically results in a shift of the supply curve, representing an increase in price for each unit.

The new market price and quantity are established where the supply curve, including tax, intersects with the demand curve.

The market quantity falls after the imposition of a per unit tax, indicating a decrease in demand.

The tax burden is shared, with consumers paying a portion through higher prices and producers paying a portion through reduced profits.

The incidence of taxation is visualized as the difference between the initial and new market prices.

Inelastic demand results in consumers bearing most of the tax burden due to their limited ability to change buying patterns.

Elastic demand leads to producers bearing more of the tax burden as consumers can easily substitute to other goods or services.

Inelastic supply means producers bear the tax burden as they cannot adjust production levels in response to the tax.

Elastic supply allows producers to adjust production, often resulting in consumers bearing more of the tax burden.

The total amount paid to the government is the sum of the tax burdens borne by consumers and producers.

Imposition of a tax often results in a decrease in total revenue for the firm due to reduced sales.

The efficiency loss or dead weight loss to society is represented by the triangular area formed by the tax's impact on the market.

Understanding the incidence of taxation helps in predicting how economic agents will respond to tax policy changes.

The video concludes with a summary of how elasticity affects the incidence of taxation in different market conditions.

Transcripts

hi folks Mr perer here with you again we

are going to spend this video talking

about a concept called incidents of

Taxation or tax incidents and see how

that concept relates to the concept of

elasticity essentially what we're going

to be figuring out here is when the

government imposes an excise tax or a

per unit tax we're going to try to

figure out how much of that tax is

ultimately paid for by the consumer how

much of that is ultimately paid for by

the producer

ucer so when we say incidents of

Taxation we're basically talking about a

the burden of Taxation how much of a

particular tax is paid for by

individuals and then how much of that is

going to be paid for by consumers unless

we're dealing with a situation of

perfect elasticity of supply or demand

or perfect in elasticity of supply or

demand the amount of a per unit tax is

going to be part partially paid by both

producer and consumer and in most

instances worldwide it's the producer

that collects the tax and then it'll

send the proceeds of this per unit tax

onto the

government so let's do some analysis

we're going to take a look at just a

normal market and when I impose a per

unit tax what I'm doing uh is I am

placing an increase amount of price on

each individual quantity that is

available for sale so what that looks

like then is a

shift of the supply curve now it isn't

there hasn't been any change in supply

all we've done is we've increased the

price of every

unit available for sale in the market by

the vertical distance of the tax so

these red arrows would represent the per

unit amount of the tax and so when we

label our new supply curve we're going

to label it Supply but including the

tax and so this again this red vertical

distance here between S and S plus tax

is the per unit amount of the

tax so if this happens then we really

have the establishment of a new market

price and Market quantity Where the S

plus tax curve intersects with the

demand curve at Point a P2 then will be

our new market price and Q2 will be our

new market quantity note that market

quantity has fallen from Qi to

Q2 I also want you to make note of

something else take a look at the

vertical distance here which is the per

unit amount of the tax and then what I

want you to do do is compare that

vertical distance to the vertical

distance associated with the change in

the market price from P initial to

P2 it looks like the value of the tax is

greater and that is indeed the case so

what this means then is that the the

consumers have paid some of that per

unit tax but it is also the producers

that have paid another portion of it

which underscores the idea that for any

excise tax or per unit tax uh the burden

of the tax is going to be shared among

producers and consumers let's see how

that really looks then in this further

analysis the diagram Point C is

important for us to establish because uh

it allows us

to get a a an idea of the price that the

producer is going to be able to keep now

I found Point C by taking a look at the

new market quantity and where that

market quantity bisected this the

initial supply curve and I made a note

of that price this is the price that the

producer gets to keep as a result of the

sales now he's ultimately collecting

price P2 but remember he has to deliver

some of that the proceeds of the each

sale to the government in the form of

Taxation and so he's going to pass P2

minus P3 this amount off to the

government and he's going to be able to

keep the

rest so this pink shaded area then

represents the burden of the taxation or

the incidence of Taxation that's paid

for by the consumer it's the market

price initial market price and then it's

the new market price so it's the

consumer that's been paying that per

unit increase times all the units that

have being for sale which is 0 to Q2 and

so

this rectangular shaped area represents

the burden of Taxation the incidence of

Taxation on the

consumer to find the tax burden on the

producer again we take the market price

and we find the difference between the

market price and the amount that the

producer gets to keep and again we have

another kind of Revenue box here and

that that graad area box represents the

burden on the producer if we were to

take this together right this

rectangular area that's bounded by P3 C

A and P2 we would get the total amount

that's paid to the government after

being collected by the

producer now I want you to make a note

of something else if we were to I were

to ask you what the in uh the original

total revenue that was collected by The

Firm before the imposition of the tax

was hopefully you would say well that

was Zero Q initial b and Pi I and so we

would have this rectangular shaped

Revenue box after the imposition of the

tax I want you to take a look at the new

Revenue that uh The Firm gets to keep

after the tax has been imposed zero Q2

now because sales have dropped C and P3

because it's P3 that is the price that

the con the producer gets to keep so

this Revenue box is noticeably smaller

so we've seen for the firm the result is

of it really any any tax is going to be

uh probably a fall in total

revenue now we have another area here a

triangular-shaped area bounded by ABC

triangle and what is what is that well

that's a an efficiency loss because

we've passed this particular tax we've

lost so Society has lost some amount of

consumer surplus and some amount of

producer Surplus when we combine that

total we call that either a total loss

of efficiency or dead weight loss to

society so uh this is a great graph

showing you the basics of how to figure

out the incidents of

Taxation the next thing we have to do is

see how this concept of incidence of

Taxation affects or is impacted by

elasticity and so really what we're

going to figure out is the incidence of

an excise tax or a per unit tax given

different elasticities of supply and

demand we're going to start with a case

of inelastic demand first and note that

I've drawn a very very nice steep

steeply sloped demand curve to indicate

relative in

elasticity when I pass my tax remember

it looks like a shift in the demand

curve or supply curve not really but

that's what it looks like and remember

that the vertical distance between S and

S plus tax is the per unit amount of the

tax so I'm going to label that s plus

tax I'm going to make a note of where

that that tax inter my demand curve

that's going to be my new market price

note the increase of P initial to P2 and

likewise the decrease in the quantity

demanded from Q initial to Q2 and that's

not a big drop in

demand uh sorry quantity

demanded now I need to figure out the

price that the consumer gets to keep I

find that again uh where the new market

quantity intersects the initial supply

curve and this is P3 here and this

analysis shows me that with in elastic

demand it is the consumer that is going

to Bear most of the tax burden and that

is indicated by the pink shaded area the

producer's tax burden is represented by

the gray shaded area and you see that

that is relatively smaller you know why

is that it's because our consumers

cannot change their buying patterns as a

result of the increase in in price and

so they're going to shoulder the burden

of the tax increase

we still have some degree of dead weight

loss or loss of efficiency uh to society

and I've noted that in my orange

triangular

box let's take a look now at the case of

elastic demand so you'll see now that

I've drawn a nice shallowly sloped

demand curve I'm going to pass my tax

I'm going to label the new curve s plus

tax I'm going to make a note of where

that tax intersects my demand curve

going to establish my new market price

and my new market quantity note that in

this particular case that the market

quantity has fallen by quite a great bit

the next thing I need to figure out is

the price that the producer gets to keep

P3 and um I note then that the taxation

burden in this particular case with in

or with elastic supply has not Fallen as

much on consumers as it has fallen on

producers why is that it's because the

demand is elastic and that means that

consumers are sensitive to prices

changes and that they've had the ability

in this case to probably substitute out

of consuming this particular good or

service and that then leaves the

producers with bearing the burden of the

taxation we still have in fact quite a

great deal in this particular case of

dead weight loss or loss of efficiency

to

society now let's take two more cases

first case elastic Supply I've drawn a

nice steeply sloped supply curve to find

the tax I'm going to uh shift my supply

curve up by the amount of the per unit

tax label my new supply curve s plus tax

find out where that tax intersects my

demand curve and establish a new market

price and a new market

quantity then I have to figure out out

the amount the price that the consumer

gets to keep or sorry the producer gets

to keep and in this particular case I

note that it looks like it is going to

be the consumer that gets off with the

lighter tax burden and it's going to be

the producer that is going to B bear the

brunt of this particular tax why is that

it's because the producer cannot make

any Supply changes as a result of the

imposition position of the tax and so

he's going to be stuck with bearing most

of the burden of that taxation we still

have some degree of uh

inefficiency uh dead weight loss to

society and again I've indicated that in

Orange last one uh case of elastic

Supply so I've drawn a nice shallowly

sloped supply curve here I'm going to uh

shift the supply curve or what looks

like a shift to the supply curve to s

plus tax the vertical distance between

those two curves again represents the

per unit amount of the tax I find out

where that tax intersects the demand

curve and I establish a new market price

and quantity at P2 and Q2

respectively then I want to take a look

at the price that the producer is

ultimately getting to keep here at P3 I

now note that relatively speaking it's

going to be the consumer that bears most

of the burden of this taxation relative

to the uh consumer why is this it's

because of elastic Supply and as a

result of the imposition of the tax The

Producers been able to make some changes

fairly quickly and that means uh he's

able to shift out of producing this

particular good or service and produce

something else so it's going to leave

the consumer with uh paying the brunt of

this particular tax note again uh the

dead weight lost to society because of

the imposition of the tax at triangle

ABC so what have we learned here well um

really uh five things I guess the

biggest thing is that um the concept of

incidence of Taxation or tax incidence

is highly related to the concept of

elasticity we also have four situations

that you might want to commit to memory

in the case of inelastic demand it's

consumers that can't change their buying

patterns and so they're going to pay the

burden of the tax with respect to the

elastic Supply it's the producers that

cannot change their production

uh uh capabilities and their production

possibilities and so they're going to

pay the tax burden with a case of

elastic demand uh consumers can change

uh and so it's going to be then the

producers that pay the tax burden with

the case of elastic Supply it's

producers that can change and so it's

the consumers that are going to pay the

tax burden so I hope it's clear how

these two concepts are related um uh

look forward to seeing you soon bye