People are still getting hopelessly bogged down with these concepts, so rather than reinventing the wheel, I refer you to the following fine articles on Tutor2u:
Price elasticity of supply/quantity supplied
Price elasticity of demand/quantity demanded.
Near the end of the second article are two supply-demand curves, which explain who actually pays a tax; if demand is less price elastic than supply, the consumer pays (most of) the tax; and if supply is less price elastic than demand, the supplier pays (most of) the tax.
So quite how it the tax is shared depends on relative price elasticity of course and not on absolute price elasticity. If you know one variable but not the other, then this gives you little clue as to who pays the tax. There is no point saying "The supply of this produce is fairly price elastic, so the consumer will bear most of the tax" if you don't know the price elasticity of demand for that product. It's like saying "John is six foot tall", you don't know if he is taller or shorter than Jim unless you know how tall Jim is as well.
Compare and contrast:
- if supply is fairly price elastic but demand is very price elastic, then the supplier ends up paying most of the tax.
- if supply is fairly price elastic but demand is not very price elastic, then the consumer ends up paying most of the tax.
Pondering assassination
1 hour ago
11 comments:
AS regards pubs you are missing out the biggest tax of the lot which is the rent gouged out of the tenants by the chains which are pretty much purely property companies with zilch interest in anything but rental income.
Things are so bad that pub nationalisation which was once on the agenda ,( I did some underage drinking and played cards for money in a nationised pub in Carlisle), should, like responsible capitalism, make a reappearance
DBC, sure.
But ground rents are a natural tax which have no effect on the supply or demand for beer and good company. The supply and demand for beer and good company determine the rental value of the pub and not vice versa.
The only relevant questions are,
- who should collect the tax?The landowner or the government? and
- to what extent do pubs restrict supply by campaigning against change of use permissions so that there is as little competition as possible (see also Ajay, our friendly chemist)?
I read the article and had a think
The article says that when demand is price inellastic then the consumer pays it. Which is what I was saying.
Sobers was saying that as well.
It was you presenting the opposite postulation. You were saying the opposite " which I would expect are even less than for restaurants, as going to the pub is even closer to being a necessity."
In - elastic means the consumer can bear a price change without causing a change in demand. Or the item is a nessesity so demand is not changed.
The graph on the right is labelled "The tax when demand is price inellastic most of the tax is payed by the consumer"
Den, I'm bored arguing who said what, I'm not going to quote you back at yourself. The main thing is that we are now agreed.
For the record, my full paragraph from which you quote was as follows, please note the part in bold:
"The Golden Rule is that who bears a tax depends on what is less price elastic (or 'price sensitive'). If quantity supplied is price inelastic (i.e. fixed), the supplier bears most of the tax; if quantity demanded is price inelastic (i.e. for necessities) then the consumer bears most of the tax.
The opposite applies to tax cuts, as is the case here. Unfortunately, the article does not tell us the fall in pub prices, which I would expect are even less than for restaurants, as going to the pub is even closer to being a necessity."
On closer inspection "even less than" is wrong isn't it? That should read "slightly more than". But we don't know the figure, neither do we know what the price elasticity of SUPPLY of restaurants, hotels and pubs are, so let's gloss over that.
Den, being vindictive, what Sobers said was this:
"Because eating out is discretionary spending, and there are many competing outlets, if VAT were cut for eating out, competition would rapidly reduce the price of meals by the amount of the VAT cut."
Which is clearly nonsense.
We all appear to agree that restaurant spending is discretionary, i.e. demand is price elastic or price sensitive.
You and I appear to be agreed that if demand is price INelastic, consumer pays the tax. So conversely, if demand is ELASTIC the supplier bears the the tax.
So with elastic demand, the restaurant customer wasn't paying the VAT in the first place, so if the VAT is reduced or scrapped, the price does not change, it can't go down because it didn't go up when VAT was introduced.
MW @ 16.41. On your own calculations - 2/3rds / 1/3rd thingy - it would seem that the restaurant meal price would go down by a bit - say 6% ish?
L, going by the Irish example, VAT was cut from 13.5% to 9% and restaurant prices went down 1.4%, i.e. by about 35% of the VAT cut.
So for want of any other evidence, if VAT were scrapped in the UK, I agree that restaurant prices would go down by about 6%.
Eating however is not discretionary, so the relative costs of cooking for oneself (Juche) and a market based specialist cooking for many make me wonder whether cooking is just a legacy of having a woman in the home most of the time (where cooking wouldn't incur much additional time costs)...
AC1
AC1, I covered the whole "eating out" versus "cooking for yourself" topic recently.
Ignoring the conspicuous consumption of eating in a posh restaurant and "taking the kids to McDonald's for a bit of a family treat" this is, as you have often said, purely a time thing...
Superficially, it is quite amazing how many people will pay £2.00 for a sandwich from the shop or supermarket when they could buy the ingredients for £0.50 and make their own packed lunch. "That's a mark-up of 300% or £1.50 down the drain!" the crowd shouts.
Nope.
IF people's hourly earnings are £15/hour and/or they value their own truly free time in those short hours between working/commuting and sleeping at £15 per hour)
AND it takes ten minutes to make your own sandwiches
THEN then the time cost of making time cost of making sandwiches for your packed lunch is £1.50.
ADD £1.50 time cost to £0.50 cost of ingredients and the sandwiches will cost you £2.00 anyway
SO why not get them from the shop or supermarket? It makes no difference.
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Hi,
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Determinants of Elasticity of Supply
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