Public Finance, 4th Edition

Tax Incidence: A Partial Equilibrium Analysis

All students of economics are introduced to the distinction between the impact and incidence of a tax at the principles level, at least in a partial equilibrium context. Recall the standard analysis of a unit sales tax paid by all producers in a competitive market, depicted in Fig. 16.1. The unit tax shifts the supply curve up vertically by the amount of the tax because each producer’s marginal cost at any given output rises by the amount of the tax. The shift in the supply curve can be thought of as the suppliers’ attempt to pass the tax on to consumers through higher prices. Whether or not they succeed depends on the elasticities of both supply and demand. As drawn in Fig. 16.1, the price charged ...