Grit-Builder: Incidence of a tax .... a problem with a shift in the supply curve. This question is designed to help you understand some of the implications of taxation. Often, policymakers argue that a tax should be imposed on firms since 'they are in a better position to pay the tax'. This thinking, however, is misguided since the burden of the tax will fall on both consumers and producers alike. Only in very rare cases will the full burden of the tax fall only on the entity (firms or consumers) that it is levied on. For example, if a government imposes a $10 tax on firms, and, as a result, prices rise by $8, firms effectively pay only 20% of the tax - consumers, facing a higher price, will pay the other 80%. This (the 20% and the 80%) is what is referred to as the incidence of the tax burden. Who pays what percentage depends critically on which curve - the demand curve or the supply curve - is more inelastic. Recall, the more inelastic the curve is, the less responsive will quantity demanded or supplied be to a change in price. As a result, the more inelastic the curve, the greater the ultimate tax burden. How do we look at a $10 per unit tax on firms? Suppose our original supply curve is P = 100 + 2 Q. Imposing the tax, the supply curve decreasing (or shifts up and to the left) and is now P = 110 + 2Q. That is, it is a parallel shift in the curve. To find the burden of the tax, one needs to compute the new equilibrium price. If it has risen, as we indicated, by $8, consumers are, effectively, paying 80% of the tax, and producers 20%. Alternatively, if the price only rose by $3.50, consumers bear 35% of the tax and producers the remainder, or 65%. Notice, if the equilibrium price were to rise by $8, firms would get $8 more for the goods they sell, but they also have to pay the $10 tax, so effectively, they pay $2 (or 20%). A tax on consumers works similarly. If the consumer were to be taxed by $10 per unit, the demand curve would shift down in parallel manner. As an example: if the demand curve is originally P = 80 - 5Q and we impose the $10 per unit tax on consumers rather than producers, the new demand curve would be P = $70 - 5Q. In other words, the reservation prices of all consumers would fall by $10. If, after the tax is imposed, the equilibrium price drops by $1, consumers bear 90% of the tax while producers bear 10% of it. If the price were to drop by $7.50, consumers bear 25% of the tax while producers bear 75% of the tax. Like the case with the producer, if the equilibrium price were to fall by $7.50, consumers pay $7.50 less for the good, but adding in the tax of $10, they effectively are paying $2.50 more, or 25% of that tax. Given this information, please answer the following question. Suppose the original demand and supply functions are given by P = 300 - 9 Q and P = 10 + Q , respectively. The government then imposes a $10 per unit tax on producers. Consumers ultimately bear __% of the tax. Record your answer as a percentage and without the percentage sign. (The number comes out nice)