Figure 15.11
In
the above figure, it can be seen that S supply curve is
horizontal straight line. The original price is PM.
When a tax is
imposed new supply curve is S
1
and the new price is P
1
M
1
. The rise
in price is P
1
T which is exactly equal to the tax amount.
Increasing Cost Conditions:
When the law of decreasing returns to the scale operates,
industry has the condition of increasing
cost and the supply curve
will be an upward sloping curve. Assuming a fairly demand, under
such
condition, the price will rise as a result of tax, but not by the
full amount of the tax imposed. That means, the incidence will not
completely fall upon the buyers but
it will be divided between
buyers and sellers. The sellers will not raise the price to the full
amount of tax as cost is already high and further rise in price would
diminish the demand.
Figure 15.12
D
O
Pr ice
Quantity
P
M
1
P
S
1
S
1
M
T
Pr ice
Quantity
P
M
D
O
1
P
S
1
S
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