8-1

Legal incidence- the individual or group that is legaly responsible for paying a tax to the
government

Economic incidence- the individual or group that bears the real burden of the tax and the
individual or group whose real income is reduced by the tax

Excess burden or welface cost- the effect of a tax on economic efficiency

Average tax rate- indicates the individual’s total tax liability as a percentage of an
appropriate index or benchmark

Marginal tax rate- indicates the percentage chance in your tax liability when the
benchmark changes

Progressive tax- when the average tax rate increases when the benchmark increases

Proportional tax- when the average tax rate remains constant when the benchmark
increases

Regressive tax- when the average tax rate decreases when the benchmark increases

8-5a
Supply and demand are both highly elastic. When supply is highly elastic, suppliers pay a
smaller share of the tax. When demand is highly elastic, consumers pay a smaller share of
the tax. These two would offset and the supplier and consumer would split the cost, so the
price of beer would go up but not by the full $0.60. The amount of beer sold in
Tallahassee would decrease as well as the number of beer sellers.

8-5b
The amount of beer sold and the number of beer sellers outside of Tallahassee will
increase because people from Tallahassee will go outside the city to sell and purchase
beer.

8-5c
Tallahassee is a college town with many alcoholic beverages to choose from. If beer is
taxed, citizens will simply drink something else.

8-5d
The economic incidence is shared by all suppliers and consumers, because every bottle is
taxed $0.60. The welfare cost is relatively large because both the supply and demand
curves are highly elastic.