Producers Lose: The Relative Percentage Reductions in Surplus Due to an AD Valorem Commodity Tax

Abstract

In traditional studies, focusing on price effects, changes in demand and cost parameters cause a tax's incidence to shift between producers and consumers. Recent incidence results focus on changes in producer and consumer surpluses; they show that with linear demand and marginal cost, a specific commodity tax causes each surplus to fall by the same percentage. This note shows that imposing an ad valorem tax on a noncompetitive market (again assuming linearity) always causes producer surplus to fall by a larger percentage than does consumer surplus. As the tax rate rises, the percentage reductions in surplus move toward equality.