is no allocative inefficiency; the cost of raising $10 a month for the
provincial government is just the $10 a month that you pay in taxes. In
this case, the tax is purely a redistribution of resources from you to the
government.
Now suppose a friend of yours is also a music lover but is not quite as
dedicated—she has a downward-sloping demand curve for CDs. The tax
leads her to cut back on her consumption of CDs from two per month to
none. In this case, your friend pays no taxes and therefore experiences no
reduction in her overall purchasing power. The direct burden of the tax is
therefore zero. However, your friend is still worse off as a result of this
tax. She is worse off by the amount of consumer surplus that she would
have received had she made her usual purchases of two CDs per month.
In this case, the direct burden is zero (because no tax is paid) but there
an excess burden equal to her loss in consumer surplus from the two CDs
per month that she no longer enjoys.
When an excise tax is imposed, some people behave like the music buff
and do not change their consumption of the taxed good at all, others
cease consuming the taxed good altogether, and most simply reduce their
consumption. There will be an excess burden for those in the latter two
groups. Thus, the revenue collected will understate the total cost to
taxpayers of generating that revenue.
The same basic analysis applies to income taxes. Figure 18-3 shows the
effect of levying a tax on workers’ incomes (or wages). The income tax
shifts the labour supply upward because workers will be prepared to