ECON 201 1st Edition Lecture 11 Outline of Last Lecture I Producer and Consumer Surplus II Cost of Taxation III Benefit of Taxation IV Who bears the burden of taxation Outline of Current Lecture I Tax Incidence and Current Policy Debate a Social Security sales tax II Government Intervention as Implicit Taxation III The Difference between Taxes and Price Controls IV Rent seeking Politics and Elasticities V Inelastic demand and incentives to restrict supply Current Lecture I II Tax Incidence and Current Policy Debate a Social Security i Both employer and employee contribute the same percentage of beforetax wages to the Social Security fund ii Although the employer and employee contribute the same percentage they do not share the burden equally iii On average labor supply tends to be less elastic than labor demand so the Social Security tax burden is primarily on employees b Sales Tax i Sales taxes are paid by retailers on the basis of their sales revenue ii Since sales taxes are broadly defined to include most goods and services consumers find it hard to substitute to avoid the tax iii Demand is inelastic so consumers bear the greater burden of the tax iv As consumers increase purchases on the internet where sales are not taxed retail stores with bear a greater burden of the sales tax Government Intervention as Implicit Taxation a Government intervention in the form of price controls can be viewed as a combination tax and subsidy 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 III IV V b An effective price ceiling is a government set price below the market equilibrium price i It acts as an implicit tax on producers and an implicit subsidy to consumers that causes a welfare loss identical to the loss from taxation c An effective price floor is a government set price above the market equilibrium i It acts as a tax on consumers and a subsidy for producers that transfers consumer surplus to producers The Difference between Taxes and Price Controls a Price ceilings create shortages taxes do not b Taxes leave people free to choose how much they want to supply and consume as long as they pay the tax c Shortages may also create black markets Rent seeking Politics and Elasticities a Rent seeking activities are activities designed to transfer surplus from one group to another b Lobbying for price controls which transfer surplus from one group to another is an example of rent seeking behavior c Individuals spend money and use resources to lobby governments to institute policies that increase their own surplus d Public choice economists argue that the taxes and benefits of government programs offset each other and do not help society significantly but they do cost resources Inelastic demand and incentives to restrict supply a When demand is inelastic increases in productivity that shift the supply curve out result in lower revenue for the suppliers b To counteract this trend suppliers have an incentive to get government to restrict supply or create a price floor thereby raising their revenue c The general rule of political economy states that small groups that are significantly affected by a government policy will lobby more effectively than large groups that are equally affected by that same policy d When supply is inelastic consumers have incentives to restrict prices e When supply is inelastic and demand increases prices increase causing consumers to lobby for price controls f Rent control in New York City is an example