Exhibit 5-9 Supply and Demand Curves for Good X

In Exhibit 5-9, assume the government places a $200 per unit sales tax on Good X. The percentage of the burden of taxation paid by consumers of Good X is:

Question

Exhibit 5-9 Supply and Demand Curves for Good X
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In Exhibit 5-9, assume the government places a $200 per unit sales tax on Good X. The percentage of the burden of taxation paid by consumers of Good X is:

Quizplus · Accepted Answer

When a sales tax is placed on a good, the supply curve shifts up by the amount of the tax, ceteris paribus. This means that the equilibrium price paid by consumers will increase, and the equilibrium quantity sold will decrease. The burden of the tax will be shared by both producers and consumers, with the exact split depending on the relative elasticities of supply and demand. In this case, since the demand curve is more elastic than the supply curve, consumers will bear a larger share of the burden of the tax. The percentage of the burden of taxation paid by consumers is equal to the ratio of the change in consumer surplus to the change in total revenue (inclusive of the tax). Using the midpoint formula, we find that the price paid by consumers will increase from $400 to $500 with the tax, a percentage increase of 25 percent. Therefore, consumers will bear 50 percent of the burden of the tax (since elasticity of demand is twice that of elasticity of supply) and producers will bear the other 50 percent.