Taxes and Subsidies
A per unit tax $t is a tax of $t per unit of output. A per unit subsidy $s is a subsidy of $s per unit of output. Consider the quantity .
The demand curve will be shifted vertically by units, and the supply curve will be shifted vertically by units.
Consider the new equilibrium point . Let the wedge be . is the intersection of wedge and demand curve, and is the intersection of wedge and supply curve.
The per unit share of tax burden / subsidy benefit can be found by and .
The government revenue from tax / cost of subsidy is . Inside the rectangle in the case of tax, the upper portion is the consumer burden / benefit (CB), and the lower portion is the producer burden / benefit (PB). It is reversed in the case of subsidy.
The less price elastic side of the market bears more burden of the tax / subsidy. If elasticity is unchanged, the ratio of burden remains unchanged even if changes.
The lost economic surplus when the socially optimal quantity of a good is not produced, given by:
Where is the equilibrium quantity without tax / subsidy, and is the elasticity of demand or supply.
To find the "total economic surplus to the society corresponding to a subsidy", we can use the formula: