Microeconomics Chapter 7

Subsidy

"negative" tax; producers receive a subsidy s for every unit produced; reduces cost by s, increases supply by s; increases quantity supplied

Why does a tax on sellers not increase the price of the good by the same amount as the tax?

Because the supply curve is shifted, which creates a new equilibrium price

Tax wedge

area of this = government's revenue from tax ( t x Q of s or Q of d)

When a good is taxed and neither demand nor supply is perfectly inelastic, what will happen to quantity produced?

it will fall

Main good taxed in society?

labor

What determines who pays most of the tax?

whoever has the least elastic curve will pay most of the tax because they have a harder time escaping the tax

Implications of the fact that taxes decrease quantity

If you want to raise revenue, tax something that is inelastically supplied or demanded. If you want to reduce quantity, make sure demand is not too inelastic for a price rise to have much effect.

Taxes on consumers does what?

decreases demand; consumers pay a tax t for every unit sold which reduces willingness to pay by t per unit and decreases demand by t

Taxes on producers does what?

decreases supply; producers pay a tax t for every unit sold which raises cost by t and decreases supply by t

Taxes

means of raising funds for public programs; create DWL by reducing gains from trade; = price paid by buyers - price received by sellers; shifts curve parallely by t units

Commodity taxes

one unit of tax per one unit of good; who ultimately pays the tax depends on the relative elasticities of demand and supply (effect is the same if tax is placed on sellers or on buyers)

When do consumers pay all of the tax?

perfectly inelastic demand or perfectly elastic supply

When do supplies pay all of the tax?

perfectly inelastic supply or perfectly elastic demand

What does a tax wedge split into?

share of tax/tax burden paid by buyers (top half) and share of tax/tax burden paid by sellers (bottom half)

What do taxes create?

the incentive to avoid ("offsetting behavior"); based on principle that people respond to incentives

What is the only difference between a graph of tax on producers and a graph of tax on consumers?

the shifting of either the supply or demand curve; so tax on one or the other affects BOTH