Register to reply

Tax incidence and Price Elasticity

by Zalajbeg
Tags: elasticity, incidence, price
Share this thread:
Jan23-14, 09:08 AM
P: 50
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
Violence rates can be halved in just 30 years, say leading experts
Power isn't enough: Study reveals the missing link for effective leadership
Persian Gulf states have new role to play in Israeli-Palestinian conflict resolution
Greg Bernhardt
May4-14, 10:11 PM
Greg Bernhardt's Avatar
P: 9,709
I'm sorry you are not finding help at the moment. Is there any additional information you can share with us?

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
Need double check on Price Elasticity Please Precalculus Mathematics Homework 2
Price Elasticity of Demand and Supply in Sharemarket Social Sciences 3