# Tax incidence and Price Elasticity

by Zalajbeg
Tags: elasticity, incidence, price
 P: 43 Hello everyone, I see that economists define a formula to calculate how the tax is shared between consumers and suppliers. They call it "Pass-thorugh" fraction: Customers share = (-PED)/(PES-PED) Suppliers share = PES/(PES-PED) However I see this doesn't work when I use it with arc-elasticity. Let us assume we have a very little supply and demand schedule Price ---------$1------$2-------$3 Supply--------10------20-------30 Demand-------30------20-------10 Let us say we have got a specific tax of$2 per unit. Then our new schedule will be: Price ---------$1------$2-------$3 Supply---------0-------0-------10 Demand-------30------20-------10 The new equilibrium price is$3 instead of \$2 and quantity is 10. Therefore I can say half of the tax is paid by customers and the other half is by suppliers. However when I use the equations above with arc-elasticity I don't get the values 0.5 and 0.5 because the P in the formula (ΔP/P) is not the same for both supply and demand. If I use the beginning value of the P instead of the middle point of new P and old P it is OK. However this is not specified in any lecture not. Am I missing something?