Microeconomics: Theory and Applications with Calculus, 4e

2.6 Effects of a Sales Tax

New Jersey’s decision to eliminate the tax on Botox has users elated. At least I think they’re elated—I can’t really tell.

How much a tax affects the equilibrium price and quantity and how much of the tax falls on consumers depends on the elasticities of demand and supply. Knowing only the elasticities of demand and supply, we can make accurate predictions about the effects of a new tax and determine how much of the tax falls on consumers.

Governments use two types of sales taxes. The most common sales tax is called an ad valorem tax by economists and the sales tax by real people. For every dollar that a consumer spends, the government keeps a fraction, $\alpha ,$[&|alp|,&] which is the ad valorem tax rate. Japan’s national ...