ECON 1113 1nd Edition Lecture 6 Outline of Last Lecture I Price Controls Case Studies A Ticket Scalping B Farm Price Supports II Changes in Demand and Supply The General Cases III Concept of Total Revenue and Total Expenditure IV Concept of Elasticity Outline of Current Lecture I Supply Demand and Elasticity Who Really Pays a Tax A Tax Incidence II Per Unit Excise Tax A The General Case B Two Extreme Possibilities Current Lecture I II Supply Demand and Elasticity Who Really Pays a Tax A Legal or statutory Tax Burden Incidence from whom the tax law says the tax will be collected 1 Example sellers suppliers of the taxed item B Economic Burden Incidence who actually pays the tax after all adjustments to tax made 1 The legal burden demand collection from the sellers but the sellers often shift some or all of the tax burden to buyers 2 If the shift is successful then economic burden falls on buyers Per Unit Excise Tax A A uniform tax imposed on each item of a taxed good B Excise Tax a tax placed on production consumption or exchange imposed on particular goods or a broad category of goods 1 Examples cigarettes gasoline tires liquor C The General Case 1 Consider a 1 per unit excise tax on gasoline OR 1 gallon of gasoline above the normal price a Legal or statutory burden will be on gasoline suppliers sellers b Supply and Demand Diagram 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 i ii iii iv v If the price of gasoline before a tax is 2 gallon but a 1 or per unit excise tax is placed on this good the supply curve will shift directly upward Graphically the supply schedule shifts upward by 1 at all quantities and this creates a new equilibrium The price paid by the buyer after the tax increases to 2 50 and the price received by the seller after the tax decreases to 1 50 The imposition of the 1 per unit excise tax would effectively increase the sellers cost of production by 1 per unit Generally the economic burden of a per unit excise tax is shared by the buyers and the sellers in this case 0 50 each regardless of the legal or statutory burden D Extreme Possibility 1 1 Suppose that the demand for gasoline is perfectly inelastic gasoline buyers do not respond to price change a Implies the elasticity of demand ED equals zero 0 b Supply and Demand Diagram i The demand curve is vertical ii The supply curve before a 1 per unit excise tax on gasoline shows the equilibrium price at 2 gallon but after the added 1 per unit excise tax the supply curve shifts upward graphically consistent by 1 above the supply curve before the tax iii The price paid by the buyer becomes 3 while the seller pays no more and gains no more than before iv The entire economic burden is on buyers even though the law says the tax will be collected from sellers E Extreme Possibility 2 1 Suppose that the demand for gasoline is perfectly elastic gasoline buyers respond immensely to price change a Implies that the elasticity of demand ED equals infinity b Supply and Demand Diagram i The supply curve is horizontal ii The supply curve rests at a constant 2 gallon before the 1 per unit excise tax but the tax causes the line to rise graphically by 1 at all quantities iii The price paid by the buyer becomes 3 while the seller pays no more and gains no more than before the tax iv The entire economic burden is on buyers even though the law says that the tax will be collected from sellers
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