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

1
S
S
A
B
Q
1
Q
u
Quantity
Pr ice
O
P
1
P
F
E
D
1
D
2
P

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As the supply curve become less elastic, keeping constant 
the demand curve and the amount of unit tax as in Figure 15.20, 
the deadweight loss of a tax becomes less. This is shown in
Figure 15.21 
 
 
 
 
Figure 15.21 
In figure 15.21, the supply curve SS
1
is less elastic than in 
figure 15.16. The pre-tax equilibrium is E, the price is OP and the 
output is OQ. If a unit tax u equal to AB as in Figure 15.17 is 
imposed, the quantity falls to OQ
1
and the price rises to P
1
. The 
deadweight loss or excess tax burden is equal to the triangle ABE 
which is smaller than the excess burden where the supply is elastic. 
 
Excess Burden of Tax on Wage Income 
A tax on wage income also gives rise to deadweight loss or 
excess burden of tax. The excess burden arises because a tax on 
wage income distorts the decisions of the workers. The excess 
burden resulting from a tax on wage income is shown in
Figure 15.22. 
In figure 15.22, OS is the supply curve of labour and WD is 
the demand curve of labour assuming perfectly elastic demand for 
labour. The point E is the pre-tax equilibrium, OW is the wage rate 
and the hours worked is ON. If a tax on wage income equal to W
1
W 
is imposed the net demand curve for labour shifts to W
1
D
1
. The 
new equilibrium is at E
1
, the net wage rate is OW
1
and the hours 
worked falls to ON
1
. The revenue received by the government 
equals W
1
WAE and the entire burden is borne by the workers.