TAX INCIDENCE, DEADWEIGHT LOSS, GOVERNMENT INCOME: ELASTIC AND

INELASTIC DEMAND CURVES

INELASTIC DEMAND ELASTIC DEMAND

St
St
So

So

P1 C A
P3

P0
P0 X X

D
P2 F
P4 B

Q1 Q0 Q2 Q0

Tax Incidence When demand curve is inelastic, the consumer carries

the burden of the tax

P1 > P3

Government Revenue Maximized when the demand curve is INELASTIC

Area P1CFP2 > ABP4P3

Deadweight loss Minimized when the demand curve is INELASTIC

Area ABX > CFX

 INELASTIC DEMAND ELASTIC DEMAND

St
St
So
So

8 C A
6

X 5
5 X

D
4 F
2
B

3 5 2 5

Tax of R4 If the demand is inelastic: If the demand is elastic:

Consumer price R8 R6
Producer price R4 R2
Who pays most of the Consumer Producer
tax? R8 > R6 R2< R6
Price increase with R3 of the R4 Price decreases with R3 of
tax- (R5 + R3 = R8) the R4 tax (R5 – R3 = R2)
Tax income B x H = 3 x (8-4) = R12 B x H = 2 x (6-2) = R8
MORE LESS
Dead weight loss ½B x H = ½(5-3) x (8-4) = R4 ½B x H = ½(5-2) x (6-2) = R6
SMALLER LARGER