I am having trouble comprehending parts C and D on problem 2A. I am not quite grasping the concept to answer how the price and quantity will change and who will pay the most of the tax in both Jacob's and Rachel's perspectives. Thank you.

I'll answer your second question (on who pays the tax) first; and then address the first question (how the equilibrium point changes).

The reading assignment does not give much instruction on how to determine "economic incidence" in paying a particular tax.  However, the following guidelines may help understand how to determine how a given tax (whether excise or sales) is allocated to the supplier and the demander.  [Note, this is my understanding of the topic, and I'm not an expert.]

The starting point is the pre-tax equilibrium price (let's call it p), this is what the demander is willing to pay for a (given) quantity of goods that a supplier is willing to accept.  After a tax is imposed, quantity becomes irrelevant in assigning the economic incidence of the tax.

After the tax, we'll have the post-tax supplier price (let's call it s) and the post-tax demander price (let's call it d).  Note that

• one will be the post-tax equilibrium price, it just depends on whether a sales tax or an excise tax was imposed;
• d - s = [tax amount]; and
• d > p > s.

Consider the following breakdown of the tax amount:

(d - p) + (p - s) = [tax paid by demander] + [tax paid by supplier].

The logic behind these formulas centers around the fact that both demander and supplier were willing to trade at p.  However, the demander now has to pay d instead and that the supplier receives only s (instead of p).

Now for the "other" question.

Since the problem is an imposition of a sales tax, the supply curve does not change (consider HW problem #1).  The steepness (or flatness) of this curve will determine how the equilibrium price (and the equilibrium quantity) changes.  To complete the problem, I would suggest first exploring what happens to the equilibrium point (and the corresponding variables of P & Q) in the four possible scenarios of combining "flat" or "steep" Demand curves with each of "flat" or "steep" Supply curves.  Match the results back to what you've identified for these curves for Rachel & Jacob.

These four scenarios should also help you formulate how to answer the question of "who will pay most of the tax" in Jacob's and Rachel's scenarios.

I hope this has helped.

Jeremy

I am sorry, I am still not quite understand the question.

I suppose that if it is a sales tax, the tax should be paid by consumer, right? (The question did not mention it is a sales tax...)

Could you please explain more about the question? Thanks a lot.

"The price of gas is $2.00 a gallon before any taxes. Suppose the government imposes a $1.00 per gallon sales tax on gas."

 

Rachel and Jacob believe that the change in price has an effect on different things than the other.  The first part of the question is how the equillibrium changes.

 

I don't understand the second part of the question though, wouldn't the consumer always be the one paying the tax because it is a sales tax?

 

www.ActuarialOutpost.com

The text does not explain the break down very clearly in the early part of the text.  It's better illustrated later with the explainations of "Consumer Surplus."

The basic idea of determining who pays the tax (consumer or supplier) rests on the prior equilibrium price.  See my earlier email about the calculations.

Hi, Vorian

Thanks for your patience to explanation.

I followed your instruction and tried to figure out part C & D.

From Jacob's perspective, the supply curve should flat since nothing to do w/ price, but steep slope for demand curve. And, from Rachael's, they should be in opposite.

Since the flatness of demand, should it be vertical? If so, after sales tax imposed, the demand curve shift left, equilibrium price and quantity both should decrease, am I right about that too? Then I got stuck now, how can I determine who pay more tax from this point?

Thank you very much

Chances favor the prepared mind...

Can someone please correct me if I am wrong.

I thought that Jacob actually has flat or flatter demand curse. Because the consumption behavior is likely to be changed by the price; so a small movement in the price will result in larger horizonal movement.

But IMO, the supply curse shalll stay rather steep or nearly vertical. Because the supply is not likely to be changed by the price as addresses by the question itself.

Can NEAS instructor clarify this?

[NEAS: Correct; the problem says this explicitly.]