In: Economics
The demand for rutabagas is Q = 2,000 − 300P and the supply of rutabagas is Q = −100 + 100P. Governor Sloop decides to impose a sales tax on rutabagas. a. Who bears the statutory incidence of a $2 per unit tax on the sale of rutabagas? b. Who bears the economic incidence of this tax, i.e., how much of the tax do consumers bear and how much of the tax do producers bear?
a) Statutory incidence of a tax tells who is legally responsible to pay the tax. Sales tax has to be paid by producers legally to the government. Thus, producers bear the statutory incidence of a tax on sale of rutabagas.
b) Economic incidence of a tax tells who actually bears the burden of tax. How much of the tax do consumers bear and how much of the tax do producers bear depends upon the elasticity of supply and demand. If demand curve is relatively inelastic than supply curve, then consumers bear the major portion of the tax and vice-versa. If demand curve is perfectly inelastic then consumer bear whole burden of tax and vice-versa.