ECON 201 1nd Edition Lecture 10 Outline of Last Lecture I Substitution and Elasticity II Elasticity Total Revenue and Demand III Other Elasticity Concepts IV Clicker Question Outline of Current Lecture I Producer and Consumer Surplus II Cost of Taxation III Benefit of Taxation IV Who bears the burden of taxation Current Lecture I Producer and Consumer Surplus a Consumer surplus the value the consumer gets from buying a product less its price b It is the area underneath the demand curve and above the price and individual pays c Producer surplus the value the producer sells the product for less the cost of producing it d It is the area above the supply curve but below the price the producer receives e The combination of consumer and producer surplus is as large as it can be at market equilibrium f Combined consumer and producer surplus decreases when price is above equilibrium g How much should Government tax h The cost of taxation include i The direct cost of the revenue paid to the government ii The loss of consumer and producer surplus caused by tax the dead weight loss These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II III IV iii The cost of administering the tax codes i The legal assignment of who pays a tax is called the statutory incidence The actual burden of a tax actual incidence may differ substantially The actual burden does not depend on who legally pays the tax elastic side takes less burden Costs of Taxation a A per unit tax shifts supply from S0 to S1 and increases price P1 and decreases quantity to Q1 b Consumer surplus is A B C before the tax and A after the tax c Producer surplus is D E F before the tax and F after the tax d Gov revenue B D The Benefits of Taxation a The benefits of taxation are the goods and services the government provides b Provides a stable set of institutions and rules c Promotes effective and workable competition d Corrects for externalities e Creates an environment that fosters economic stability and growth f Provides public goods g Adjusts for undesirable market results h Benefit principle of taxation the individuals who receive the benefit of a good or service should pay the tax necessary to supply the good i Ability to pay principle individuals who are most able to bear the burden of the tax should pay the tax Who bears the burden of a tax a The person who physically pays the tax statutory incidence is not necessarily the person who bears the burden of the tax b Tax Burden change in CS or PS c Burden depends of relative elasticity d The more inelastic one s relative supply and demand the larger the tax burden one will hear