Question

I understand the answer to this I am just having a hard time creating a graph for it.

Bill the butcher is upset because the government plans to tax beef $.10 a pound. "I hate paying taxes," he says. "Because of this, I'm raising all my beef prices by $.10 a pound. The consumers will bear this burden, not me." Do you see anything wrong with this way of thinking? Explain. Draw a graph describing your answer and attach it with your response.

Answer 1

Unless supply curve is perfectly elastic (horizontal) or demand curve is perfectly inelastic (vertical), the tax burden will be shared between buyer and seller. The more elastic (inelastic) the demand and the more inelastic (elastic) the supply, the lower (higher) the share of tax paid by the buyer, and the higher (lower) the share of tax paid by the seller. Therefore, Bill cannot normally shift the entire tax burden to the buyers.

In following graph, D0 and S0 are pre-tax demand and supply curves, intersecting at point A with equilibrium price P0 and quantity Q0. The tax shifts S0 leftward to S1 (where vertical distance between S1 and S0 is $0.1), intersecting D0 at point B. After-tax price paid by buyers is higher at P2, after-tax price received by sellers is lower at P1 (where P2 - P1 = Unit tax = $0.1) and quantity is lower at Q1.

Tax burden of buyers = P2 - P0

Tax burden of sellers = P0 - P1