Economics 1: Principles of microeconomicsMonday, May 7, 2012Lecture 10Review:-Commodity taxes: who collects the tax may not be who pays the taxPreview:Impact of supply elasticity on tax incidenceWedge shortcutThe amount of tax collectedInefficiencies of taxIncome taxesTax equitySupply elasticity of Tax Incidence:SISES^I SI 4.004.504.40Q^*Q*4.004.504.40P*IP*EP*0.50/gallonElastic DemandP inc. by 0.15Consumer pays 0.15Producer pays 0.35 Total 0.500.50/gallonInelastic DemandP inc. by 0.35Consumer pays 0.35Producer pays 0.15Inelastic Supply Curve0.50 taxConsumers pay 0.05Producers pay 0.45Economics 1: Principles of microeconomicsMonday, May 7, 2012Lecture 10Red line represents the taxS^ESE Wedge Short Cut:Amount tax = amount paid by producer + amount paid by consumer0.50 = 0.45 + 0.05 (Graph 1)0.05 = 0.05 + 0.45 (Graph 2) = 0.50 tax The length here lines up with the line in the graph LM 4.504.454.003.95Q^*Q*Quantity in $ drops a lot more0.50 taxConsumer pays 0.45Producer pays 0.05Larger drop in quantity4.154.003.654.154.003.654.254.003.75Amount of tax collected = (Amount of tax per unit) x (# of units sold) (0.50 x 10,000 units) = $5,000Consumers pay $2,500Producers pay $2,500Economics 1: Principles of microeconomicsMonday, May 7, 2012Lecture 10Q* (10,000 units)A very elastic demand curves0.50 QD Q* (8,000) (10,000)AS Tax revenues = 8,000 (0.50) = 4000Consumer pays 8,000 (0.10) = 800Producer pays 8,000 (.40) = 3200AWEZBXYDIDESQEDQIDNGS = A, B,CProducer surplus is C, B, P*Consumer surplus is A, B, P*Tax is imposed --> L-->O (M --> N)Quantity drops to Q*^Producer surplus is N, O, CConsumer surplus is A, L, MTax revenue for inelastic demand----> A, B, C, ETax revenue for elastic demand----> W, X, Y, Z(Smaller Q, same tax of 0.50)----> smaller tax revenueLONMBCEconomics 1: Principles of microeconomicsMonday, May 7, 2012Lecture 10DQ^* Q*Tax revenues = L, M, N, ODead weight loss = M, N, BIncome Taxes:S - workersLabor MarketIncome Tax Incidence in US:FED State and Local TotalBottom Quintile 7.9% 11.8% 19.7%2nd Quintile 11.4% 11.9% 23.3%3rd Quintile 15.8% 11.2% 27.0%4th Quintile 18.7% 11.0% 29.7%Next 15% 21.1% 10.5% 31.6%Next 4% 27.5% 9.7% 32.2%Last 1% 24.6% 8.2% 32.8% If only taking only 0.80 of 1.00No incentive to work as muchEconomics 1: Principles of microeconomicsMonday, May 7, 2012Lecture
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