The presentation is intended to help the AP or IB microeconomics teacher easily explain the effects of a lump-sum tax or subsidy or per-unit tax or subsidy.
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1. By Mike Fladlien Effects of Subsidies and Taxes on Price and
Output Determination
2. The Effect of a Lump-Sum Subsidy 3. Initial Equations FC = 12
VC = .5Q^2 TC = FC + VC AFC = 12/Q ATC = 12/Q+VC/2 MC = Q The left
side of the ATC curve represents fixed costs being spread out over
output. The right side of the ATC curve represents diminishing
marginal returns. That is, adding more and more of a variable input
to a fixed input gives less and less output. 4. A lump-Sum Subsidy
is given to the firm When a one time subsidy is given to the firm,
the subsidy reduces fixed costs. In other words, the subsidy has
the effect of decreasing costs. Lets grant a $6 lump- sum subsidy.
Our equations change to: FC = 6 VC = .5Q^2 TC = FC + VC AFC = 6/Q
ATC = 6/Q+VC/2 MC = Q Note: Price, MC, and profit maximizing output
do not change 5. Comparison Net Effect A lump-sum subsidy lowers
fixed costs. This means that there are less fixed costs to spread
out over output. As a result, marginal cost intersects at the
minimum ATC to the left of the original ATC. The net result is more
profit. 6. Effects of Lump-Sum Subsidy The net effects: Price of
the product does not change Quantity of output doesnt change Profit
increases ATC decreases at each unit MC doesnt change 7.
Continuation Effects of a Lump-sum Tax on Price and Output
Determination 8. Initial equilibrium FC = 12 VC = .5Q^2 TC = FC +
VC AFC = 12/Q ATC = 12/Q+VC/2 MC = Q 9. A Lump-Sum Tax is Added FC
= 20 VC = .5Q^2 TC = FC + VC AFC = 20/Q ATC = 20/Q+VC/2 MC = Q 10.
Comparison Net Effects A lump-sum tax acts like an increase in
fixed costs. Since fixed costs have increased, it takes more output
to spread out fixed costs. As a result marginal cost intersects the
new ATC curve to the right of the original point of intersection.
11. Continued Per Unit Tax 12. Initial equilibrium FC = 12 VC =
.5Q^2 TC = FC + VC AFC = 12/Q ATC = 12/Q+VC/2 MC = Q 13. A Per Unit
Tax is Imposed Suppose the firm generates a negative externality
and a per unit tax is imposed. FC = 12 VC = 1.5Q^2 TC = FC + VC AFC
= 12/Q ATC = 12/Q+VC/2 MC = Q 14. Comparison Net Effect A per unit
tax elevates the ATC curve and shifts the MC curve to the left. 15.
Continued Lump Sum Tax 16. Initial equilibrium FC = 12 VC = .5Q^2
TC = FC + VC AFC = 12/Q ATC = 12/Q+VC/2 MC = Q 17. Comparison Net
Effect The net effect of a lump sum tax is to shift the ATC curve
up. As a result, it takes a larger amount of output to spread out
fixed costs so profit decreases. 18. Conclusion 19. Imperfect
Markets Our analysis applies to imperfect markets as well. In this
example a lump tax was applied to a product that was producing
negative spillover effects. Note the price and quantity dont
change. The only thing that changes is the profit. 20. Thanks For
Reading This You can contact me at: [email protected][email protected] My blog is: Mikeroeconomics.blogspot.com I
want to Thank Gene Hayward for his inspiration
