H2 Econs Tuition - Microeconomics - Incidence of Subsidy

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When showing the incidence of a tax or subsidy, the following steps will be useful in ensuring that students identify the correct share of tax/subsidy attributed to consumers and producers.
i. Assume that tax or subsidy affects production cost, hence shifting the supply curve.
ii. Always evaluate according to new equilibrium quantity exchanged, i.e. q2.
iii. Vertical distance between supply curves at q2 represents size of tax or subsidy.
iv. Consumer’s share is indicated by change in equilibrium price.
v. The party with the more elastic curve would have a lower incidence of tax/subsidy.
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