Public Economy essay sample

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Ad valorem tax is a tax imposed on the monetary value of a product. It is levied at the time of a transaction for example value-added tax or sales tax. Unit tax, on the other hand, is imposed as a specific fixed amount for each unit of service or good sold.

For example excise tax.

a) QS= QD2000 – 200P = 200P2000 = 200P + 200P2000 = 400PP = $ 5But QD = 2000 – 200PQD = 2000 – 200* 5 = 2000 – 1000QD = 1000 unitsQS = 200P = 200*5= 1000 units

b) before tax, QD = 2000 – 200P QS = 200P PS = PDAfter tax, PS = PD - ∏D = 5 – 2 = $ 3Therefore QS= Q’D200P = 2000 – 200P200 * 3 = 2000 – 200P600 = 2000 – 200P200P = 2000 – 600200P = 1400PD = $ 7quantity sold and demandedQS = 200 * 3 = 600QD = 2000 – 200 * 7 = 600Price paid by consumersPD = $ 7Price received by sellersPS = $ 3Revenue received by the governmentR = Q * ∏D= 600 * 2 = 1200Economic tax incidenceOn buyers (PD – P0) / ∏ 7 – 5 / 2= 2/2= 1

The economic incidence therefore fall 100 % on buyers and also the sellers bear the same 100 % burden of the tax.assumptions of harberger model Capital and labor are perfectly mobile.The structure of the market is perfect completion

The preferences of the consumers are identical

The framework of the tax incidence is the differential tax incidence.The firms enjoy constant returns to scale. However, production may differ respectively with the elasticity of substitution.

If the partial tax on capital is levied in the food sector, the relative price of manufacturing rises if the manufacturers are labor intensive due to the increase in the relative price of capital. If the manufactures are capital intensive, the relative price of capital will decrease (Joseph E. Stiglitz, n.d.). This is referred to as the output effect. On the other hand, if substitution is possible, the relative price of capital will decrease due to the factor substitution effect. The burden of partial tax on capital in the food sector lies on those whose large proportion of their income is from the capital. Those who consume the large proportion of food will also bear the burden.


Joseph E. Stiglitz, J. K. R. (. (n.d.). Economics of the Public Sector (Fourth Edition) (Fourth Edi). New York: W. W. Norton & …

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