What is "tax incidence"? Describe how a $1 per gallon increase in the gas tax will result in an after-tax price increase that is less than $1 2

Tax incidence describes the distribution of the tax burden. When producers are taxed, some or all of the tax may eventually be passed on to consumers. Because the supply curve shifts when a tax is implemented, if the supply curve is sloped, less than the whole amount of the tax is passed on (see attached file). Note that if the upward shift in the supply curve from S1 to S2 represents $1, the change in P from P1 to P2 is less than this distance.

2. Looking at the attached graph, you can visualize how a change in the slope of the demand curve (green) would change the final price P2. Changing the slope of the supply curve would also alter the final price.

3. The height of the supply curve represents the costs of the sellers. Therefore, because the sellers are not bearing the cost of the externality, the supply curve is lower than it should be. You can use the attached chart and think of this as the S1 supply curve. Now if a tax is instituted to cover the cost of the pollution, the supply curve shifts to S2. This passes part of the cost of the externality on to the consumers. You can also think of the curve S1 as being the private cost to buyers, and S2 is the social cost to society. The most efficient quantity and price are therefore Q2 and P2. Because the market will adjust to S1 without government intervention, the market would be at the inefficient levels of Q1 and P1.

plaese see attched file.