Figure 4-8 The Effect of a Gasoline Excise Tax
The burden of an excise tax is distributed between consumers and sellers in a manner that
depends on the relative elasticities of supply and demand.Let’s consider a case where the government imposes an excise tax on
gasoline. The analysis begins in Figure 4-8. To simplify the problem, we
first show the case where there is no tax, as illustrated by the solid supply
and demand curves. What happens when a tax of t cents per litre of
gasoline is then introduced? With an excise tax, the price paid by the
consumer, called the consumer price, and the price ultimately received by
the seller, called the seller price, must differ by the amount of the tax,
The burden of an excise tax is shared by consumers and producers.
original supply and demand curves for gasoline are given by the solid
lines S and D; equilibrium is at with price and quantity When
an excise tax of t cents per litre is imposed, the supply curve shifts up to
the dashed line which lies above the original supply curve by the
amount of the tax, t. The new equilibrium is at The tax increases the
consumer price but by less than the full amount of the tax, and reduces
E 0 p 0 Q 0.
S′,
E 1.