A commodity tax is a tax on goods or services.
Tyler Cowen (reference below, video on right) identifies the three important ideas about commodity taxation:
- Who pays the tax does not depend on who writes the check to the government
- Who pays the tax does depend on the relative elasticities of demand and supply
- Commodity taxation raises revenue and creates lost gains from trade (dead weight loss)
Who actually pays does not depend on who writes the check
Cowen illustrates the first point – that the economic incidence of the tax does not depend on the legal incidence of the tax – by walking through two the two graphs below, looking first at the effect of a tax on sellers and second at the effect of a tax on buyers.
Using the “tax wedge” for analysis
Cowen explains that, since it doesn’t matter whether the buyers or sellers are taxed, one can use an easier technique for determining the price and quantity effects of a commodity tax – the “tax wedge.” The diagram below shows the effect of “driving a $1 tax wedge into the supply and demand curves.”
Practice questions (from MRU Chapter 4)
From http://www.mruniversity.com/node/186781, accessed 28 April 2016.
Tyler Cowen, Commodity Taxes, Marginal Revolution University, 11-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/taxes-subsidies-definition-tax-wedge, accessed 28 April 2016.
Atlas topic and subject
Page created by: Ian Clark, last modified on 29 April 2016.
Image: Minute 0.20 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/taxes-subsidies-definition-tax-wedge, accessed 28 April 2016.