econ 2302 unit 4 ch 8 cost of taxation test
elastic demand (greater than 1)
A situation in which consumer demand is sensitive to changes in price (many substitutes, breakfast foods or compact cars)
buyers, sellers, and the government.
A tax affects
raises the price that buyers effectively pay and lowers the price that sellers effectively receive.
A tax on a good
demand curve for tuxedos downward, decreasing the price received by sellers of tuxedos and causing the quantity of tuxedos to decrease.
A tax placed on buyers of tuxedos shifts the
laffer curve
Increasing taxes from zero will cause tax revenue to increase up until some point after which continuing to raise taxes will cause tax revenue to fall.
tax revenue
T (tax) x Q (quantity sold) =
incentives and distort market outcomes
Taxes are costly to market participants not only because they transfer resources from participant to the government, but also because they alter...
Lead to losses in surplus for consumer and for producers that, when taken together, exceed tax revenue collected by the government
Taxes cause deadweight losses because taxes
I+Y.
The deadweight loss due to the tax is measured by the area
supply side economics
The economic theory of Laffer & "Reaganomics" that emphasized cutting taxes and government spending in order to stimulate investment, productivity, and economic growth by private enterprise
dead weight loss
The fall in total surplus that results from a market distortion, such as a tax.
increase by $3.
The imposition of the tax causes the price paid by buyers to
decrease by $2
The imposition of the tax causes the price received by sellers to
tax revenue
The income that is gained by governments through taxation
L+M+Y.
The producer surplus before the tax is measured by the area
J+K+L+M.
Total surplus after the tax is measured by the area
supply curve shifts upward by the amount of the tax.
When a tax is imposed on the sellers of a good, the
shrink
a tax on a good causes the size of the market for that good to ___
inelastic
anti-venom is an example of an ____ product
behavior
deadweight loss occurs because taxation induces buyers and sellers to change their ___.
horizontally
elastic demand/supply curves are more ___ orintated
it pushes them out of the market, not only do they both miss out on potential surpluses & benefits, but the government also loses tax opportunity
how does taxation effect marginal sellers and buyers?
upward by the amount of the tax
if the tax is levied on the seller, the supply curve shifts:
the government benefit is accrued with those who receive the products/services bought with tha revenue. It is most beneficial when it is spent efficiently. not often the case.
if you use consumer and seller surpluses to measure total market benefit, how do you measure the government's (public) benefit from its involvement in the market?
greater
it would also stand to reason, if a product has many substitutes, then the taxation would have a much _____ effect on the market [aka deadweight loss], (keeping in mind marginal buyers and sellers, the availability of substitutes, and the fact it is not required for life to carry on)
smaller
it would stand to reason, if a product is inelastic - a necessity- the deadweight loss would be ______ if that item were taxed.
inelastic
most economists mistakenly believe that labor is ___.
gains from trade
taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the...
the revenue raised from the taxes
the cost of taxation, to both buyers & sellers, typically exceeds...
dead weight loss (better known to me as a tax wedge - rightward pointing triangle from the location of the tax toward the equilibrium price)
the difference between what the buyer pays and the seller receives after a tax has been imposed
dead weight loss
the greater the elasticity of suppy and demand, the greater the ___ ____ ____ from taxation
inelastic
the more vertical the demand or supply, the more ___ a product is
either the buyer or producer of a good
the tax is the same whether it it levied on...
THERE IS ALWAYS A CHOICE TO PARTICIPATE IN THE LABOR FORCE - stay at home parents weigh childcare cost over net earnings (post tax), - stay at home parents may not work because it would put them in a higher tax bracket, - the higher a wage, the more hours a worker traditionally chooses to work, - early retirement may be more appealing than continuing to work, - some would choose illegal or undocumented work to keep govt services (hurting govt revenue, people who are wait listed for special services [Section 8 housing], and those who choose to work [pay income tax])
what reasons could you argue that labor is inelastic?
downward by the size of the tax
when the tax is levied on the buyer, the demand curve shifts:
the government
who is the 3rd interested party in a market?
both buyers & sellers
who is worse off because of taxes?
oliver wendell holmes jr
who said "Taxes are what we pay for a civilized society"?