Upload
miles-crawford
View
216
Download
0
Tags:
Embed Size (px)
Citation preview
TAXES!
Why do I tax all the time?
How Taxes Affect Market Outcomes
• Market not efficient– Total surplus not maximized
• When a good is taxed, the quantity sold is smaller.
• Buyers and sellers share the tax burden.
Tax incidence
• When the burden of a tax is shared among participants in a market
If there is a sales tax on buying these candy worms, it’s not just the kid with worms
who feels the burden of the tax
Price Qd Qs$1 50 10$2 40 20$3 30 30$4 20 40$5 10 50
CANDY WORM MARKET
Let’s say there is a $0.50 tax on buying candy worms
3 questions must be answered to figure out the tax incidence
Question 1: Does the tax affect the supply curve or the demand curve?
Question 2: Which way does the curve shift?
Question 3: How does the shift affect equilibrium?
S1
What happens if there is a $0.50 tax on the buyer?
D1
P
Q
Your turn
3 questions must be answered to figure out the tax incidence
Question 1: Does the tax affect the supply curve or the demand curve?
Question 2: Which way does the curve shift?
Question 3: How does the shift affect equilibrium?
Assume the government wants to reduce the amount of sugar Americans are consuming. So, they enforce a
excise tax of $1.00 for every candy worm produced.
S1
What happens if there is a $0.50 tax on the seller?
D1
P
Q
Elasticity and Tax Incidence
• In what proportions is the burden of the tax divided?
• How do the effects of taxes on sellers compare to those levied on buyers?
• The answers to these questions depend on the elasticity of demand and the elasticity of supply.
How the Burden of a Tax Is Divided
Quantity0
Price
Demand
Supply
Tax
Price sellersreceive
Price buyers pay
(a) Elastic Supply, Inelastic Demand
2. . . . theincidence of thetax falls moreheavily onconsumers . . .
1. When supply is more elasticthan demand . . .
Price without tax
3. . . . than on producers.
How the Burden of a Tax Is Divided
Quantity0
Price
Demand
Supply
Tax
Price sellersreceive
Price buyers pay
(b) Inelastic Supply, Elastic Demand
3. . . . than onconsumers.
1. When demand is more elasticthan supply . . .
Price without tax
2. . . . theincidence of the tax falls more heavily on producers . . .
Your turn…again
Luxury Tax
• In 1990, Congress adopted a new luxury tax on items that only the rich could afford. The goal of this tax is to raise revenue from those who could easily afford to pay
• Answer this question: Does the price incidence truly affect buyers more?
• Write a short answer and provide a supply and demand curve to further explain your answer.