In the above diagram, S is the original supply curve sloping
upward. S
1
is the new supply curve after tax.
Prices rise by P
1
Q.
The total tax amount is P
1
T per unit of which the buyer has to share
only P
1
Q while rest QT is borne by the seller. Hence, when an
industry is operating in increasing cost condition, the whole burden
of tax will
not be borne by any one party, but will be divided
between buyers and sellers.
3) Market Structure:
a) Incidence Under Perfect Competition:
Under perfect competition, price is determined by the interaction
of market demand and market supply. Price is the vehicle through
which tax burden can be shifted. To the extent a seller
can raise the
price when a commodity tax is imposed; incidence is shifted on to
the buyer.
In a competitive market, thus, the burden of taxation upon a
party (buyer or seller) is largely determined
by the market forces
and demand and supply. Whether a tax can be shifted or not
greatly depends upon the degree
of elasticity of demand and
supply. The extent to which a tax on a particular commodity will be
shifted to the buyer (consumer) as such will vary inversely to the
change in the elasticity of demand and directly with the elasticity of
supply.
Figure 15.13
In the above figure, D is the demand curve and S the supply
curve for a commodity. PQ is the price per unit before tax and OQ
is the amount sold per unit.
Suppose a tax P
1
R per unit is levied
which is collected from the sellers. S
1
is the new supply curve after
the imposition of tax. P
1
Q then is the new price, and OQ
1
the new
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