Economics 1: Principles to microeconomicsWednesday, May 9, 2012Lecture 11Review:-Commodity (Excise) tax- Incidence of the taxo How much consumer/producer pays depending on how elastic the supply and demand curves areo Longer tax is in place, the less the consumer will bear because longer time means more elastiac- Less is traded- Consumer and Producer surplus decrease- Dead Weight Loss is presentPreview:-Tax fairness-Subsidies: mirror image of taxesTax Fairness:- progressive: the tax rate increases as wealth increases- regressive: the tax rate goes down as wealth increases- proportional: the tax rate is the same for all earners2 Types of Fairness:1. Horizontal equity: people in approx. similar situations will pay approx. the same in tax2. Vertical equity: people in different situations should pay reasonably different levels of tax2 Principles to consider:1. Benefits principle: those who benefit from a government service/ good should be the one to pay the higher taxa. Ex. If a road is built near a factory and the factory benefits it from shipping and transportation purposes, then the factory should pay the taxes for that roadb. If bearing the benefits, then you should pay most/all of the tax2. Ability to pay principle: those with higher incomes should pay more and a higher ratea. Direct link to progressive view of taxesEconomics 1: Principles to microeconomicsWednesday, May 9, 2012Lecture 11Subsidies: -reward for a specific activityGoal is try get the producer to produce more.SS^4.15 D Q*S S* dropped 0.25DEDIQ*4.003.853.15Subsidy Benefits:0.15 benefits to the consumers0.10 benefits to the producers4.15 is the price paid by producers3.85 is the price paid by consumers4.00CIPIWith an inelastic D, the consumer receives more of the subsidy than with an elastic DEconomics 1: Principles to microeconomicsWednesday, May 9, 2012Lecture 11Impact on the market of a subsidy:4.00 0.25 tax; Dead weight loss of (Wedge short cut) Q* Q^*All units between Q* and Q^* cost more to produce. A4.10 L M G Q* Q^*Directing resources away from what is desired more in order to produce more unitsProducer surplus after subsidy is G, L, 4.10Consumer surplus after subsidy is A, M, 3.85Dead weight loss is L, M,
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