Tax incidence and Price Elasticity

by Zalajbeg
Tags: elasticity, incidence, price
Zalajbeg is offline
Jan23-14, 09:08 AM
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

Let us say we have got a specific tax of $2 per unit. Then our new schedule will be:

Price ---------$1------$2-------$3

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?
Phys.Org News Partner Social sciences news on
Change 'authoritarian' football culture to produce future stars, says research
Male-biased tweeting
Developing nations ride a motorcycle boom

Register to reply

Related Discussions
price elasticity of demand Calculus & Beyond Homework 3
Price Elasticity, Partial Derivative Calculus & Beyond Homework 1
Price Elasticity of Demand Help Calculus & Beyond Homework 2
[SOLVED] Need double check on Price Elasticity Please Precalculus Mathematics Homework 2
Price Elasticity of Demand and Supply in Sharemarket Social Sciences 3