[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

A
A tax on cigarettes
B
A tax on cheddar cheese
PRICE OF CIGARETTES
Price paid by
consumers
Price
without tax
Price received
by producers
Supply curve
before tax
Supply curve
after tax
10¢
Demand
curve
PRICE OF CHEDDAR
Price paid by
consumers
Price
without tax
Price received
by producers
Supply curve
before tax
Supply curve
after tax
10¢
Demand
curve
Q 1 Q 0 Q 1 Q 0
QUANTITY OF CIGARETTES (Q )
QUANTITY OF CHEDDAR (Q )
Figure 4.8
PASSING ALONG A TAX TO
CONSUMERS
A tax on the output of an industry shifts the supply curve up by the amount of the tax.
Panel A shows that if the demand curve is relatively inelastic, as it is for cigarettes, then
most of the tax will be passed on to consumers in higher prices. Panel B shows that if
the demand curve is relatively elastic, as it is for cheddar cheese, then most of the tax
cannot be passed along to consumers in higher prices, and must instead be absorbed
by producers.
the demand curve for cheddar cheese is very elastic. In this case, as Figure 4.8B
makes clear, most of the tax is absorbed by the producer, who receives (after the
tax is paid) a lower price. Production of cheddar cheese is reduced drastically as
a consequence.
Shortages and Surpluses
In general, the law of supply and demand works so well in a developed modern economy
that everyone can take it for granted. A buyer willing to pay the “market price”—
the prevailing price of the good, determined by the intersection of demand and
supply—can obtain almost any good or service. Similarly, if a seller of a good or service
is willing to charge no more than the market price, she can always sell what she
wants to.
When the price is set so that demand equals supply—so that any individual can
get as much as he wants at that price, and any supplier can sell the amount she
wants at that price—economists say that the market clears. But when the market
does not clear, there are shortages or surpluses. To an economist, a shortage means
that people would like to buy something but simply cannot find it for sale at the
going price. A surplus means that sellers would like to sell their product, but they
cannot sell as much of it as they would like at the going price. These cases that seem
88 ∂ CHAPTER 4 USING DEMAND AND SUPPLY