Microeconomics,, 16th Canadian Edition

the seller price, also by less than the full amount of the tax. The tax also
reduces the equilibrium quantity exchanged.

In terms of the figure, we can analyze the effect of the tax by considering
a new supply curve that is above the original supply curve S by the
amount of the tax, t. This leftward (or upward) shift of the supply curve,
caused by the imposition of the excise tax, will cause a movement along
the demand curve, reducing the equilibrium quantity. At this new
equilibrium, the consumer price rises to (greater than ), the seller
price falls to (less than ), and the equilibrium quantity falls to
Notice that the difference between the consumer price and the seller price
is exactly the amount of the excise tax, t.

Note also that the quantity demanded at the consumer price is equal to the
quantity supplied at the seller price, a condition that is required for
equilibrium. As shown in the figure, compared with the original
equilibrium, the consumer price is higher and the seller price is lower,
although in each case the change in price is less than the full extent of the
excise tax. The difference between and is the amount of the tax that
the consumer ends up paying; the difference between and is the
amount of the tax the seller ends up paying. The burden of the excise tax
is shared between consumers and sellers in proportion to the rise in price
to consumers relative to the fall in price received by sellers.

After the imposition of an excise tax, the difference between the consumer and seller prices is

equal to the tax. In the new equilibrium, the quantity exchanged is less than what occured

without the tax.

S′

E 1 , pc p 0

ps p 0 Q 1

p 0 pc

p 0 ps