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OU ECON 1113 - Tax Incidence, Per-Unit Excise Tax, and Its Outcomes

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ECON 1113 1nd Edition Lecture 6 Outline of Last Lecture I. Price Controls: Case StudiesA. Ticket ScalpingB. Farm Price SupportsII. Changes in Demand and Supply: The General CasesIII. Concept of Total Revenue and Total ExpenditureIV. Concept of ElasticityOutline of Current Lecture I. Supply, Demand, and Elasticity: Who Really Pays a Tax?A. Tax IncidenceII. Per-Unit Excise TaxA. The General CaseB. Two Extreme PossibilitiesCurrent LectureI. 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 collected1. Example: sellers (suppliers) of the taxed itemB. Economic Burden (Incidence): who actually pays the tax after all adjustments to tax made1. The legal burden demand collection from the sellers, but the sellers often shift some or all of the tax burden to buyers2. If the shift is successful, then economic burden falls on buyersII. Per-Unit Excise TaxA. A uniform tax imposed on each item of a taxed goodB. Excise Tax: a tax placed on production, consumption, or exchange imposed on particular goods or a broad category of goods1. Examples: cigarettes, gasoline, tires, liquorC. The General Case1. Consider a $1 per-unit excise tax on gasoline OR $1/gallon of gasoline above the normal pricea. Legal, or statutory, burden will be on gasoline suppliers (sellers)b. Supply and Demand DiagramThese 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. 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 upwardii. Graphically, the supply schedule shifts upward by $1 at all quantities, and this creates a new equilibriumiii. 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 $1.50iv. The imposition of the $1 per-unit excise tax would effectively increase the sellers’ cost of production by $1 per-unitv. 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, burdenD. Extreme Possibility #11. 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 Diagrami. The demand curve is verticalii. The supply curve before a $1 per-unit excise tax on gasoline shows the equilibrium price at $2/gallon, but afterthe added $1 per-unit excise tax, the supply curve shifts upward, graphically consistent by $1 above the supply curve before the taxiii. The price paid by the buyer becomes $3, while the seller pays no more and gains no more than beforeiv. The entire economic burden is on buyers (even though the law says the tax will be collected from sellers)E. Extreme Possibility #21. Suppose that the demand for gasoline is perfectly elastic (gasoline buyers respond immensely to price changea. Implies that the elasticity of demand (ED) equals infinityb. Supply and Demand Diagrami. The supply curve is horizontalii. 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 quantitiesiii. The price paid by the buyer becomes $3, while the seller pays no more and gains no more than before the taxiv. The entire economic burden is on buyers (even though the law says that the tax will be collected from


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OU ECON 1113 - Tax Incidence, Per-Unit Excise Tax, and Its Outcomes

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