Econ 101 - Ch. 6 - Taxes

Tax Burden

*Falls more heavily on the side that is less elastic. *Small elasticity of demand (buyers do not have good alternatives to consuming this good). *Small elasticity of supply (sellers do not have good alternatives to producing this good).

Very Elastic Supply and Relatively Inelastic Demand

*Sellers bear a small burden of the tax. *Buyers bear most of the tax burden.

Relatively Inelastic Supply and Very Elastic Demand

*Sellers bear most of the tax burden. *Buyers bear a smaller amount of the tax burden.

How Do Taxes on Buyers Affect Market Outcomes?

Buyers and sellers share the burden of the tax. Sellers get a lower price, are worse off. Buyers pay a lower market price, are worse off.

Different Types of Taxes

Excise Sales Luxury Estate Income Profits Property Wealth

How Do Taxes on Sellers Affect Market Outcomes?

Supply curve shifts left. Higher equilibrium price. Lower equilibrium quantity. The tax reduces the size of the market.

Payroll Tax

Taxes deducted from the amount you earned. *Half paid by firms out of revenue. *Half paid by workers out of paycheck.

Market Outcomes of Taxes on Sellers

Taxes discourage market activity. Buyers and sellers share the burden of the tax. Buyers pay more, are worse off. Sellers receive less, are worse off. *sellers get a higher price, but pay the tax. *Overall for sellers: effect price decrease.

Tax Wedge

Taxes levied on sellers and buyers are equivalent. Shifts the relative position of the supply and demand curves where buyers and sellers share the burden.

Tax Incidence

The manner in which the burden of a tax is shared among participants in a market (buyers and sellers)