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Tax incidence determination by elasticity

1. What is "tax incidence"? Describe how a $1 per gallon increase in the gas
tax will result in an after-tax price increase that is less than $1

2. How does the increase in the after-tax price depend on the price elasticity of demand
and the price elasticity of supply?

3. Burning gasoline creates pollution? Is this pollution a negative
externality? If so, use social cost and demand to graphically
depict how you could "correct for the negative externality. ( Just show direction - don't need numbers - Just want to understand how this would look on a graph)

Solution Preview

1. Tax incidence describes the distribution of the tax burden. When producers are taxed, some or all of the tax may eventually be passed on to consumers. Because the supply curve shifts when a tax is implemented, if the supply curve is sloped, less than the whole amount of the tax is passed on (see attached file). Note that if the upward shift in ...

Solution Summary

How the price elasticity of demand and the price elasticity of supply determines tax incidence.

$2.19