The land question in smallholder development in South Africa - Institutional Constraints to Small Farmer Development in Southern Africa - page 199

price from the original equilibrium point at P eq. to a new level at P 1 . The seller's wish will
definitely be that he is able to completely cover the extra costs brought about by the tax and
still sell the same quantity. But the market situation suggested by the slope of the supply
curve is a competitive one where it is not always possible for a seller to 'eat his cake and
have it'. What would normally happen is that a buyer, on whom no tax has been specifically
targeted, but who all the same is required to indirectly assume responsibility for the tax
burden of the seller, will become less motivated to buy the commodity to the same degree
at the higher price.

Thus, the first thing that happens comes from the reaction of the buyer in reducing the
demand for the commodity which results in the demand curve D 1 D 1 shifting to the left to
D 2 D 2 where a preference is declared for a lower price P 2 . Since that price means that the
seller will sell at a loss if the same quantity is supplied, the logical thing will be to reduce the
quantity supplied to Q 1 which corresponds to a new intersection point of S 1 S 1 and D 2 D 2 .
But this is an unsustainable position because at that price, the seller's costs are not even
being covered. This will force the buyer to accept a higher price at P 1 while buying a reduced
quantity Q 1 . So, a tax imposed on a seller forces the seller and buyer into a compromise
in order to accommodate the reduced enthusiasm of the buyer for the higher-priced
commodity and the frustration of the seller with higher costs. Thus, there is a sharing of
the tax burden here between the buyer and seller - the seller receives a reduced price while
the buyer pays a higher price. If we assume the tax burdens for the seller and buyer are t s and
t b , respectively, their shares of the tax burden can be denoted as follows:

t s = P eq - ( P 1 - T ) / T (1)

Where:
t s = the tax burden on the seller;
P eq = the original equilibrium price;
P 1 = the final price received by the seller;
T = the amount of tax imposed per unit of commodity.

In the same way, we can denote the buyer's share of the tax as follows:

t b = ( P 1 - P eq ) / T (2)

Where:
t b = the tax share of the buyer;
P 1 = the final price paid by the buyer;
P eq = the original equilibrium price;
T = the tax imposed on the seller.