Micro Foundations · intermediate
What moves on the Supply & Demand diagram
A per-unit tax shifts supply up by the tax amount; the incidence splits between buyers and sellers by relative elasticityelasticityHow strongly one variable responds to another, usually quantity's percentage response to a price change..
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change..
The government imposes a $t tax per unit on sellers.
Sellers now need $t more at every quantity to supply the same amount. S shifts up by exactly the tax.
New equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.: price paid by buyers rises (by less than t), price received by sellers falls, quantity falls.
The burden is shared between buyers and sellers according to relative elasticities, the vertical gap between old and new price is the tax incidence split.
Examiners ask this as: per unit tax, excise tax, tax on sellers, cigarette tax, sugar tax.
Other scenarios on Supply & Demand