## Wolfram Demonstrations Project: "Tax Incidence"

To use this simulation, you must download and install the Mathematica Viewer. Although this software is free, it is a sizable download. This activity is therefore optional.

This guided simulation is meant to show you how a tax is shared between the producer and the buyer. The buyer pays their share of the tax as part of the transaction, and the seller sells less and receives less revenue. This lost revenue is one way that producers "pay" their share of the tax.

Once you have downloaded the software package to your desktop, open the demonstration and read all the instructions. Set the sliders so that the elasticities of both supply and demand equal 1.50 and the tax is 0.75. In this case, the tax incidence is shared equally between the producer and the buyer. In addition to each having 50% of the tax burden, they also share equally in the deadweight loss.

Now increase the slope of the demand curve (making demand less elastic). What happens to tax incidence? Whose share increases? Record the results in your notes, then decrease the slope of the demand curve. What happens to deadweight loss, and how is the tax incidence shared?

Finally, set demand at is max elasticity and supply at its minimum elasticity. What do you observe? Record the result and then set the sliders to the opposite: demand elasticity at a minimum and elastisticity of supply at a maximum.

In which markets would the producers or sellers be the most vocal about a tax increase? Under what circumstances would buyers be more vocal about a tax increase? Record your thoughts in your notes. (Hint: It has a lot to do with whether the market is for a necessity good or a luxury good.)