Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 CANDY WORM MARKET Price $1 $2 $3 $4 $5 Qd 50 40 30 20 10 Qs 10 20 30 40 50 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? What happens if there is a $0.50 tax on the buyer? P S1 D1 Q Your turn 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. 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? What happens if there is a $0.50 tax on the seller? P S1 D1 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 (a) Elastic Supply, Inelastic Demand Price 1. When supply is more elastic than demand . . . Price buyers pay Supply Tax 2. . . . the incidence of the tax falls more heavily on consumers . . . Price without tax Price sellers receive 3. . . . than on producers. 0 Demand Quantity How the Burden of a Tax Is Divided (b) Inelastic Supply, Elastic Demand Price 1. When demand is more elastic than supply . . . Price buyers pay Supply Price without tax 3. . . . than on consumers. Tax 2. . . . the incidence of the tax falls more heavily on producers . . . Price sellers receive 0 Demand Quantity Your turn…again Luxury Tax 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.