{"id":1460,"date":"2009-03-18T04:44:54","date_gmt":"2009-03-18T12:44:54","guid":{"rendered":"http:\/\/www.oeconomist.com\/blogs\/daniel\/?p=1460"},"modified":"2009-03-19T04:15:21","modified_gmt":"2009-03-19T12:15:21","slug":"who-pays-the-price-if-you-want-more","status":"publish","type":"post","link":"https:\/\/www.oeconomist.com\/blogs\/daniel\/?p=1460","title":{"rendered":"Who pays the price \/ if you want more<\/q>"},"content":{"rendered":"

In economics, when we write or speak of the incidence<\/q> of a cost or of a benefit, we refer to the ultimate distribution<\/em>.<\/p>

Most<\/em> people get<\/span> the idea that, often, costs or benefits can be passed along<\/em>, so that the party upon whom they formally<\/em> fall isn't necessarily the final recipient. This is certainly true of taxes<\/em>.<\/p>

There's a standard result of microëconomics that, if one sets aside the effects of transactions cost<\/em> (dat ol' debbil), then the incidence<\/em> of a per-unit tax is same, regardless of whether it is formally<\/em> placed on the seller or formally<\/em> placed upon the buyer. Almost every first-term microëconomics course demostrates this result, although they usually dumb-it-down by failing to note that transactions costs can somewhat undermine the equivalence.<\/p>

The argument goes as follows: Imagine that the quantity offered for sale fits some function S<\/var>(Ps<\/sub><\/var>) where Ps<\/sub><\/var> is the price received by the seller, and that quantity that buyers seek fits some function D<\/var>(Pb<\/sub><\/var>) where Pb<\/sub><\/var> is the price that buyers must pay. If the pre-tax price is just P<\/var>, and sellers have to pay additional tax and tax-related costs of ts<\/sub><\/var>, and buyers have to pay tax and tax-related costs of tb<\/sub><\/var>, then

Ps<\/sub><\/var> = P<\/var> - ts<\/sub><\/var><\/blockquote> (tax-related cost subtracted<\/em> because it is a reduction<\/em> in the price that what the seller receives) and
Pb<\/sub><\/var> = P<\/var> + tb<\/sub><\/var><\/blockquote> (tax-related cost added<\/em> because it is an increase<\/em> in how much the buyer must pay). Algebraïcally,
Pb<\/sub><\/var> = Ps<\/sub><\/var> + ts<\/sub><\/var> + tb<\/sub><\/var><\/blockquote> and
Ps<\/sub><\/var> = Pb<\/sub><\/var> - tb<\/sub><\/var> - ts<\/sub><\/var><\/blockquote> And the market would equilibrate where
S<\/var>(Ps<\/sub><\/var>) = D<\/var>(Pb<\/sub><\/var>)<\/blockquote> (At a lower P<\/var>, D<\/var> would be greater than S<\/var>, and it would be in the interest of sellers to increase their prices or of buyers to offer a little more per unit; and, a higher P<\/var>, S<\/var> would be greater than D<\/var>, and it would be in the interest of sellers to cut their prices a bit, or for potential buyers to cut the amount that they offered.) Which is to say that the equilibrium is
S<\/var>(Ps<\/sub><\/var>) = D<\/var>(Ps<\/sub><\/var> + ts<\/sub><\/var> + tb<\/sub><\/var>)<\/blockquote> as if the buyer formally paid all the tax on the seller's received price, and
S<\/var>(Pb<\/sub><\/var> - tb<\/sub><\/var> - ts<\/sub><\/var>) = D<\/var>(Pb<\/sub><\/var>)<\/blockquote> as if the seller formally paid all the tax on the buyer's paid price.<\/p>

(The next time that you hear or read of a politician arguing for employer-provided benefits, such as for health-care, consider the incidence<\/em>.)<\/p>

Now, let's consider the incidence<\/em> of a tax on carbon emissions<\/em> (ignoring the question of whether there should be such a tax), in the absense of transactions costs<\/em>, the incidence would be the same whether the state formally taxed the producer of the emissions, or taxed the consumer of each product associated with the emissions, based upon the amount of the emission associated with that product. But it is plainly<\/em> less costly to place the formal<\/em> tax on the producer than to have separate filings for each consumer.<\/p>

Which brings me to this<\/em> story:

China seeks export carbon relief<\/q> from the BBC<\/abbr><\/a>
China has proposed that importers of Chinese-made goods should be responsible for the carbon dioxide emitted during their manufacture.<\/blockquote><\/div> Whatever measures are imposed to curtail carbon emissions, they can be conceptualized as a tax. And it's really, folks, not<\/em> that the Chinese officials don't understand that the incidence would be the same (or very nearly the same) in the absence of transactions costs, nor that they don't recognize that the transactions costs would be lower if the tax were formally imposed upon producers. Rather, it's that the Chinese state
  • knows that some consuming nations would avoid or evade the tax, lowering the incidence upon China,<\/li>
  • would be able to disguise<\/em> some of its emissions for domestically<\/em> consumed production as emissions for exported<\/em> product, and<\/li>
  • would like to misdirect<\/em> blame for any failure to reach agreement.<\/li><\/ul><\/p>","protected":false},"excerpt":{"rendered":"In economics, when we write or speak of the incidence of a cost or of a benefit, we refer to the ultimate distribution.Most people get the idea that, often, costs or benefits can be passed along, so that the party upon whom they formally fall isn't necessarily the final recipient. This is certainly true of […]","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_bbp_topic_count":0,"_bbp_reply_count":0,"_bbp_total_topic_count":0,"_bbp_total_reply_count":0,"_bbp_voice_count":0,"_bbp_anonymous_reply_count":0,"_bbp_topic_count_hidden":0,"_bbp_reply_count_hidden":0,"_bbp_forum_subforum_count":0,"footnotes":""},"categories":[6,36,104,4],"tags":[554,553,151],"class_list":["post-1460","post","type-post","status-publish","format-standard","hentry","category-commentary","category-economics","category-news","category-public","tag-tax-incidence","tag-taxation","tag-transactions-costs"],"_links":{"self":[{"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=\/wp\/v2\/posts\/1460","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1460"}],"version-history":[{"count":0,"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=\/wp\/v2\/posts\/1460\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1460"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1460"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.oeconomist.com\/blogs\/daniel\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1460"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}