Principles of Microeconomics / Unit 4 MIC 0324 worked example, 60 to 90 seconds
Splitting the Burden
The idea
From a diagram or a table, find three prices: the price before the tax, the price buyers pay after, and the price sellers receive after. Buyers' share of each unit's tax is the after-tax buyer price minus the old price. Sellers' share is the old price minus the after-tax seller price. The two shares add to the tax. Then say which side bears more and why, by comparing the elasticities: the larger share falls on the side less able to change its quantity.
In practice
Worked example: bottled juice clears at three dollars before a one-dollar tax. After the tax, buyers pay three dollars seventy and sellers keep two dollars seventy. Buyers bear seventy cents of each dollar, sellers thirty cents, so demand is the more inelastic side. In a second market, hotel rooms, a twenty-dollar tax moves the buyer price from one hundred to one hundred five and the seller price to eighty-five; buyers bear five dollars and sellers fifteen, so supply is the inelastic side.
Where people slip
The shares must add exactly to the tax; if they do not, one of the three prices is wrong. And a share is a per-unit split, not a total: to find total burden multiply each share by the after-tax quantity, which the next video uses for revenue.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it