Shifting of tax is influenced by the nature of elasticity of demand. We know that there are five different types of elasticity of demand. In today’s article we are going to know about Shifting of Tax under different demand condition (Taxation). So let’s discuss this.
Table of Contents
Shifting of Tax
Perfectly Elasticity of demand
If the demand for a commodity is perfectly elastic, the whole burden of a tax will be borne by the seller. In this case price can not be increased. This is shown in the below figure-
In the above figure, DD is the perfectly elastic demand curve and SS is the supply curve. Hence MP is the equilibrium price. Due to imposition of tax supply curve become S1S1. Here the new equilibrium price is M1P1. From the above figure we get MP = M1P1. Hence entire burden of the tax is borne by seller.
Perfectly Inelasticity of demand
If the demand for a commodity is perfectly inelastic the whole burden of a tax will be borne the consumer. In this case price can be increased. This is shown in the following figure-
In the above figure, DD is the perfectly inelastic demand curve and SS is the supply curve. Hence DP is the equilibrium price. Due to imposition of tax the supply curve become S1S1. Here the equilibrium price is DP1. From the figure we get DP1 = PP1. Hence the entire burden of tax will borne by the consumer.
Unique elasticity of demand
If the demand for a commodity is equal to one (Unique elastic), the burden of tax is equally distributed between buyers and sellers. This is shown in the below figure-
In the above figure, DD is an unitary elastic demand curve and SS is the supply curve. Due to imposition of tax, the price level was MP. After imposition of tax price level become M1P1. Here the total tax burden M1P1 is distributed equally between buyers (PT1P) and sellers (PT1N1).
Relatively inelasticity of demand
If the demand for a commodity relatively inelastic (less than 1), the buyers borne. The larger burden of tax then the seller. This is shown in the following figure-
In the above figure, DD is the relatively inelastic demand function and SS is the supply curve. Before imposition of taxation the price level was MP. After imposition of tax price level becomes M1P1. Here the total tax burden PP1N1 is distributed between buyers and sellers. Buyers (PP1T1) and sellers (PT1N1) where the larger amount by buyers.
Relatively elasticity of Demand
If the demand for a commodity is relatively elastic (greater than 1), the seller borne the larger burden of tax than the buyers. This is shown by the following figure-
In the above figure, DD is the relatively elastic demand curve and SS is the supply function. Before imposition of taxation the equilibrium price level was MP. After imposition of tax price level become M1P1. Here the total tax burden P1PN1 is distributed between buyers (PP1T1) and sellers (PT1N1).
Conclusion
So friends, this was Shifting of Tax under different demand condition (Taxation). Hope you get the full details about it and hope you like this article.
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