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Donald A. Coffin

Actually, there's a simple formula that gives pretty good results. Treating all elasticities as absolute values, with Es being price elasticity of supply, Ed being price elasticity of demand and PctB being the percent of the excise tax paid by the buyer:

PctB = (Es)/(Es + Ed)

Note that at the extremes, it works--if Ed = 0, buyers pay all the tax and if Es = 0, sellers pay all the tax. It works in the middle--if Es = Ed, each pays 50% of the tax.

Donald A. Coffin

Actually, there's a simple formula that gives pretty good results. Treating all elasticities as absolute values, with Es being price elasticity of supply, Ed being price elasticity of demand and PctB being the percent of the excise tax paid by the buyer:

PctB = (Es)/(Es + Ed)

Note that at the extremes, it works--if Ed = 0, buyers pay all the tax and if Es = 0, sellers pay all the tax. It works in the middle--if Es = Ed, each pays 50% of the tax.

Donald A. Coffin

Note also that the constant elasticity linear supply curve is a supply curve through the origin. In the example shown, that is not true, so those supply curves have different elasticities.

Phil

Hi Don.

You are right about my example. I wanted to show a simple example where a linear supply curve had a constant elasticity along its length, unlike a linear demand curve.

djohnson

The explanation I've seen is based on normalized elasticity: percent change in price as a function of the percent change in quantity supplied (or demanded). When you calculated elasticity this way, rather than as the absolute slope of the supply (or demand) curve, the elasticity changes as you move left or right even though the slope of the line is constant. This result is the same as you've suggested.

I'm not sure there's actually a disagreement here.

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