Question

Let QD=80-P and QS=2P-100 describe the demand and supply function for a commodity. Suppose that government imposes a $3 tax per unit sold on producers. What is the tax burden (incidence) of consumers?

Answer 1

QD = 80 - P

QS = 2P -100

Equilibrium quantity and price before imposition of tax -

QD = QS

80 - P = 2P - 100

P = 60

QD = 80 - P, but P = 60

QD = 80 - 60 = 20

QD = 20

Therefore, before imposition of tax, equilibrium price is $60 per unit and equilibrium quantity is 20 units.

After imposition of a tax of $3 per unit, the supply function changes as follows;

QS = 2(P-3) - 100 = 2P - 106

Equilibrium price and quantity after imposition of tax

QD = QS

80 - P = 2P - 106

P = 62

QD = 80 - P, but P = 62

QD = 80 - 62 = 18

QD = 18

Therefore, after imposition of tax, the equilibrium price is $62 per unit and equilibrium quantity is 18 units.

Thus, the price for consumers has increased by $2 per unit after the imposition of a tax of $3 per unit. So, consumers are paying $2 out of $3 per unit tax.

Therefore, the tax burden of consumers is $2 per unit.

Before the imposition of the tax, the equilibrium price was $60 per unit. After the imposition of the tax, the equilibrium price is $62 per unit. Hence, the tax burden of consumers is $2 per unit.