How is tax incidence calculated for soda?? Which model components and formula is
ID: 1107721 • Letter: H
Question
How is tax incidence calculated for soda?? Which model components and formula is applied?? TABLE 2: Censumption, Demand Elasticity and Ta Table Price (per fuid ounce) National Consumption Califernis Consumptise Price Elasticity of Ta lecidence (P Threugh) Segary Beverage Seda Fruit Beverages Sports Drink inergy Drinks Enhanced Waer Ready-to-Drink Tea Ready to Dritk Coffee Tax (per fluid ounce) 002 Ifrom your sources) (ouncesyear) 0.0866 0.0865 00765 year) Demand 1223052,800,000 203,456,000,000 48,198,400,000 45,176,000,000 8,880,000,000 9,206,400,000 ,592,000,.000 1764,761,600,000 0% 470% 437 43·1% 1.25 0.02 S 002 s 0.02 17,105,659,170 12,459,850,JE5 49%)63 774 6659,315,442 3,163,955 1.41 1.21 1.21 00869 002 S 002 S 320% 0.0607 2464
Explanation / Answer
Incidence of Tax:
It means impact of a particular tax imposed on any comodity here it's Soda.Incidence of tax tells that how much of tax burden is borne by buyer or seller. The impact of tax (Incidence of tax) depends upon the elasticities of Supply and Demand of that particular commodity (Here Soda). For example, if demand is very inelastic than supply then major portion of tax will be borne by buyer and vice-versa. An extreme example will tell better: let suppose that elasticity of demand is completely inelastic and elaticity of supply is completely elastic then the burden of tax will fall completely on buyer i.e. entire tax is borne by buyer.
Abbreviation:
Ed = Price elasticity of demand
Es = Price elasticity of supply
Formula:
The fraction of tax that seller bears (It) = -Ed/(Es - Ed)
In case of Soda, we are given,
Tax Incidence (Pass Through) = 69% (i.e. seller is able to pass 69% tax burden on buyer)
Tax incidence on seller = (100 - 69)% = 31%
Price elasticity of demand = -1.25
So by applying the above formula we can get the price elasticity of supply (Es) :
=> 0.31 = - (-1.25)/ (Es - (-1.25)
=> Es = 2.77
Clearly, we can see that in case of soda, Price elasticity of supply is more elastic than demand price elasticity. Hence Incidence of tax will fall more on buyer.