Public Finance and Public Choice

Read this chapter to learn how the government provides goods and services in the economy to alleviate problems of the market system.

3. Financing Government

3.2. Answer to Try It! Problem

The tax adds a $20 wedge between the price paid by buyers and received by sellers. In Panel (a), the price rises to $120; the entire burden is borne by buyers. In Panel (c), the price remains $100; sellers receive just $80. Therefore, sellers bear the burden of the tax. In Panel (b), the price rises by less than $20, and the burden is shared by buyers and sellers. The relative elasticities of demand and supply determine whether the tax is borne primarily by buyers or sellers, or shared equally by both groups.

answer to try it