Public Economics Lectures Part 1: Introduction

Tax Incidence with Salience Effects: Formula
Incidence on producers of increasing t is
dp
dt =
∂D/∂t
∂S/∂p − ∂D/∂p = −θ ε D
ε S − ε D
1 Incidence on producers attenuated by θ
2 No tax neutrality: taxes on producers have greater incidence on
producers than non-salient taxes levied on consumers
Intuition: Producers need to cut pretax price less when consumers are
less responsive to tax
Public Economics Lectures () Part 2: Tax Incidence 37 / 142