Download Difficult Topics in Microeconomics: Tax analysis

Difficult Topics in
Microeconomics: Tax analysis
Luis Fernandez
And
Teresa Fischer
Teaching Objectives of Tax Analysis



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Application of supply and demand analysis.
Refute the “fly-paper theory” of tax incidence.
Determine the welfare effects of a wellknown type of public policy - taxation.
Relate tax incidence to demand and supply
elasticities.
Analysis of a $1/unit excise tax
Typical Supply and Demand Diagram
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
A $1/unit excise tax is enacted
Price (paid by buyers)
$6
$5
$4
Supply
Demand
$3
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
What happens to the demand curve?
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
9
Quantity Supplied and Demanded
10
11
Nothing happens to the demand curve!
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
9
Quantity Supplied and Demanded
10
11
What happens to the supply curve?
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
9
Quantity Supplied and Demanded
10
11
The supply curve shifts up by $1/unit!
Result: price paid by buyers goes up
and quantity sold goes down
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
9
Quantity Supplied and Demanded
10
11
Result: price paid by buyers goes up
by LESS than the tax!
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Welfare Analysis
Price (paid by buyers)
$6
Consumer surplus
$5
$4
Supply
$3
Demand
$2
$1
Producer surplus
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Welfare Effect of tax:
consumer surplus falls
Price (paid by buyers)
$6
New consumer surplus
$5
$4
Supply
$3
Demand
$2
Old consumer surplus
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Welfare Effect of tax:
producer surplus falls
Price (paid by buyers)
$6
New producer surplus
$5
$4
Supply
$3
Demand
$2
Old producer surplus
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Welfare effect of tax:
tax revenue goes up
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
Tax revenue
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Welfare effect of tax:
fall in surplus is greater than tax
revenue
$6
Price (paid by buyers)
Consumer Surplus
$5
$4
Supply
Tax revenue
$3
Demand
$2
$1
Producer Surplus
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Welfare effect of tax:
total welfare goes down
Price (paid by buyers)
$6
Consumer and Producer
Surplus and Tax Revenue
$5
$4
Supply
$3
Demand
$2
$1
“Dead-weight” loss of tax
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11