Burden of the Tax A standard line of thought you hear on the streets is as follows: corporations are evil because when the government taxes them, they pass on the tax to consumers, and we end up paying the tax they should pay." Let's think about this. Assume the supply and demand curves for a product (widgets) are S(p) = 100p and D(p) = 400 Burden of the Tax Suppose the government levies a tax of $0.5 per widget sold. What price will consumers pay in the post equilibrium tax? Suppose now that the tax is of 10% of the sales tax. That is, if the sales price is p then the government gets 0.1p. Define what an equilibrium with taxes is. In the equilibrium with the 10% tax, is it true that consumers will pay 10% more than they paid before the tax? The previous bullet points highlight why the common wisdom at the beginning of this problem is flawed. Explain what economic forces are at play that make the original argument false. Burden of the Tax A standard line of thought you hear on the streets is as follows: corporations are evil because when the government taxes them, they pass on the tax to consumers, and we end up paying the tax they should pay." Let's think about this. Assume the supply and demand curves for a product (widgets) are S(p) = 100p and D(p) = 400 Burden of the Tax Suppose the government levies a tax of $0.5 per widget sold. What price will consumers pay in the post equilibrium tax? Suppose now that the tax is of 10% of the sales tax. That is, if the sales price is p then the government gets 0.1p. Define what an equilibrium with taxes is. In the equilibrium with the 10% tax, is it true that consumers will pay 10% more than they paid before the tax? The previous bullet points highlight why the common wisdom at the beginning of this problem is flawed. Explain what economic forces are at play that make the original argument false