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Tax incidence and Price Elasticity 
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#1
Jan2314, 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 "Passthorugh" fraction: Customers share = (PED)/(PESPED) Suppliers share = PES/(PESPED) However I see this doesn't work when I use it with arcelasticity. Let us assume we have a very little supply and demand schedule Price $1$2$3 Supply102030 Demand302010 Let us say we have got a specific tax of $2 per unit. Then our new schedule will be: Price $1$2$3 Supply0010 Demand302010 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 arcelasticity 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? 


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