The incidence of tax is different on the basis of elasticity of supply. We know that there are five different types of elasticity of supply. In today’s article we are going to know about shifting of tax. So let’s discuss this.
Table of Contents
Shifting of tax under different supply condition
Perfectly elasticity of Supply
When the supply of the commodity is perfectly elastic. The entire burden of tax will be upon the buyers. This is shown in the figure-
In the figure SS is the perfectly elastic supply curve. Here PM is the price level before tax. After imposition of tax S1S1 becomes new supply curve. Here the new price level is P1M1. Where the entire burden PP1T1 bear by buyer.
Perfectly inelasticity of Supply
If the supply of the commodity is perfectly inelastic, the entire burden will be upon the seller. In figure 2, SS is the perfectly inelastic supply curve. OP is the price level before the imposition of tax.
Suppose, PT amount of tax is imposed. Due to tax and inelasticity of supply, the seller would not like to increase price level. For this reason the seller bears the entire amount of tax.
Unitary elasticity of supply
If the supply of a commodity is unitary elastic, the burden of tax will be equally distributed between buyer and seller. This is shown in the figure 3.
In the above figure SS is the supply curve and DD is the demand curve of unitary elastic. Before imposition of the tax the price level was PM. After imposition of the tax price become P1M1. Which is equally distributed between the buyers (PP1T1) and seller (PT1N1).
Relatively inelasticity of supply
When the supply of a commodity is relatively inelastic, the seller bears the larger amount of tax. This is shown in the following figure – 4.
In the above figure, SS is the relatively inelastic supply taxation and DD is the demand function. Before imposition of tax price was PM. After imposition of tax price level become M1P1. Due to imposition of tax supply function shifts from SS to S1S1. Here the equilibrium price M1P1. Where the larger amount of tax is bear by the seller. PP1N1 – PP1T1 = PT1N1.
Relatively elasticity of Supply
When supply of a commodity is relatively elastic. The larger amount of tax is bear by buyer. This is shown with the help of the figure – 5.
In the above figure SS is the relatively elastic. Supply curve and DD is the demand curve before imposition of tax the price level was PM and after imposition of tax the price level becomes P1M1 where the larger amount of tax is bear by the buyer (PP1N1– PN1T1= PP1T1).
So friends, this was the shifting of tax. Hope you get the full details about it and hope you like this article.
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