Key Concepts

• • A per-unit tax shifts supply up by the tax amount, raising consumer price (Pd) and lowering producer revenue (Ps)
• • Tax incidence depends on elasticities — the less elastic side bears more of the tax
• • The purple rectangle shows tax revenue (= tax × new quantity)
• • The orange triangle is deadweight loss — welfare destroyed by the tax
• • Set tax to negative to model a subsidy — supply shifts down, quantity increases