Econ 102 ch 6

Excise tax

"per unit tax" A tax on a specific good; alcohol, tobacco, gasoline, for example cigerettes

Deadweight loss:

- A cost to society in the form of less economic welfare resulting from the tax. - Caused by the decrease in the amount of trade that is occurring.

Consumer surplus graphically:

- Consumer surplus is the area below the demand curve and above the price, for all units purchased. You can only get consumer surplus on units that you actually buy! - CS is NOT the entire area under the demand curve.

Why would the government want to tax a good with very inelastic demand?

- No substitutes (ensures steady tax revenue) - Amount of purchases will not change much (or not change at all if perfectly inelastic demand) • This means little or no deadweight loss!

Producer surplus graphically:

- Producer surplus is the area above the supply curve and below the price, for all units sold. • Important concept: - The firm can only get producer surplus on units that it actually sells! - PS is NOT the entire area above the supply curve.

If a tax is levied on consumers:

- Some of the burden is passed to producers since the market price falls.

• If a tax is levied on a business:

- The firm will attempt to raise prices to pass some of the burden to consumers.

Economic welfare is composed of two measures of market value:

Consumer surplus • Producer surplus both contribute to social welfare +taxation is another form of market distortion

In free markets with voluntary trade:

Consumers buy until their willingness to pay is equal to the market price. - Suppliers sell until their willingness to sell is equal to the market price.

Consumer surplus

Difference between willingness to pay for a good and the price actually paid to get the good

Tax incidence is the same no matter who the tax is levied on.

Elasticity of demand and supply can change tax incidence, though.

Types of taxes

Income, payroll, corporate, sales, excise, estate

Efficiency

Occurs when total surplus is maximized in a market

Why do we pay taxes?

Pay for public goods, police, roads, schools, etc.

Tax incidence

Refers to the party (consumers or producers) who bears the tax burden easier for the government to levi taxes on firms/producers

Incidence

Whether the tax is levied on the producer or consumer, the end incidence result is the same!

Producer Surplus

Willingness to sell determined by: - Direct costs - Opportunity costs Difference between willingness to sell a good and the price actually received for that good

laffer curve

illustrates the relatinoship between tax rates and tax revenues

Tax on Buyers

tax burden falls on both buyers and sellers

Total surplus (or social welfare) measures

the overall welfare of the society. Total surplus = CS + PS

welfare economics

the study of how the allocation of resources affects economic well-being +about how well of people (consumers/producers) are in a particular market.