Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
Excess Burden of a Unit Tax (Excise Tax) 
The excess burden of a unit tax under constant cost and 
increasing cost is explained below. 
 
Constant cost 
The excess burden of a unit tax or excise tax under the 
assumption of constant cost is shown in figure 15.18. DD
1
is the 
demand curve. Assuming constant cost for simplicity, SS' is supply 
curve. The pre-tax equilibrium is at A, the price is OS and the 
quantity is OQ. If a unit tax, u = SS
1
= BC is imposed the supply 
curve shifts to S
1
S'
1
. The new equilibrium is at C, the price inclusive 
of tax rises to OS
1
and the output falls to OQ
1
. The tax revenue is 
equal to SS
1
CB. Since we are dealing with the constant cost the 
entire burden is on the consumer which is equal to tax revenue. 
 
 
 
 
Figure 15.18: Constant Cost Condition 
 
However the burden of tax on the consumer is more than the 
tax revenue. Before the tax the consumer paid OSAQ for OQ 
quantity but consumer was willing to pay ODAQ. Thus the 
consumer received a consumer surplus equal to the differential 
between actual and potential payment which is equal to SDA. But 
1
D
S
1
S
S
A
B
Q
1
Q
u
Quantity
Pr ice
1
S
C
D
O

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the imposition of unit tax the consumer surplus has been reduced 
to SS
1
CA. Out of this, SS
1
CB is the revenue of the government and 
therefore the triangle ABC is a deadweight loss or excess burden to 
the economy. 
If we rotate the demand curve DD
1
at the point A making it 
more steeper or less elastic, the triangle ABC becomes smaller. 
This is shown in figure 15.19