ECO2030 1st Edition Lecture 14Outline of Last Lecture I. Government policies - price ceiling and price floorsOutline of Current Lecture II. Taxes and who pays them, the buyers or the sellersIII. Taxes and elasticity Current Lecture● Recognize whether a price floor or ceiling is binding or not (for exam, refer to lecture 13),○ Expect question such as what is the shortage? ● in the long, price and demand become more price elastic, so shortages are greater.● When there are shortages we are worried about discrimination. ● recall that when price floors are implemented, such as minimum wage, supply of labor increases so instead of a shortage, you get a surplus, again we are worried about discrimination. ○ Labor is also substitutable, so when wages increase too much then companies will utilize more automation. ● Anything that changes the equilibrium price is binding! (for both price floors and ceilings).● Policies intended to help the poor often hurt morepeopleTaxes: Buyers or sellers may be required to pay the tax(it is the same)● every tax will reduce quantity sold● the tax has to be shared by buyers and sellers, In this example we analyze a $1.50 tax on buyers onPizzaYou can see on the right that this essentially raises theprice by $1.50, meaning the demand will decrease (shiftto the left). In order for sellers to supply the same amount of pizza (500) they would have to drop the price by the same amount of the tax ($1.50)Again, this is another example of a tax on buyers. Seehow in this case we are looking at who pays the tax, youcan see that the buyers are paying $1, whereas thesellers are paying 50 cents. Remember that every taxshifts the demand curve left because it increases theprice. $9.50 is what the suppliers receive and $11 is what thebuyers have to pay. The difference is the tax which is$1.50. So you can see that the buyers and sellers bothshare the tax. If the tax is one the suppliers, we see that the supplycurve shifts by the amount of the tax. You should thinkabout the tax as an increase in the cost of production. Again, you can see here that the tax is shared by boththe buyers and sellers. buyers pay $11 and suppliersreceive $9.50, the difference is the tax. Again, the buyersare paying $1 of the tax and the sellers pay 50 cents. think of it like a wedge, buyers always pay more thansellers receive so the price buyers pay is always theupper amount and the price sellers get is always thelower amount. All that really matters is that a tax on buyers or a tax onsellers, makes no difference, the tax will be sharedeither way! Since we can ignore who pays the tax we can use asimplified method to determine the New Price sellers,buyers pay and the new quantity sold.In this example we are determining the effect of a $30 tax on hotel rooms. Since the tax is 30, it will decrease the demand because buyers will buy less. What we do is find the change the the left of the equilibrium point, the change is 30 so in this case it is 3 boxes. you draw the line and you will have the new price sellers receive ($60), the new price buyers pay ($90) and the new quantity demanded (100). You can think of this as the wedge that the tax drives between the purchasers and suppliers. Elasticity determines who pays more of the tax.As you will see both the elasticity of the demandand the supply curve affect who pays more tax.In this case, the supply is more elastic than thedemand (supply curve is flatter), this means thatsellers are more likely to leave the market whilebuyers have less choices available, therefore when the supply curve is more elastic than thedemand curve buyers typically pay more of thetax than sellers.When the demand curve is more elastic thanthe supply curve sellers pay the majority of thetax. this is because when the demand curve iselastic it means that buyers are more sensitive tothe price. Another way to put it is that buyers havemore alternatives such as substitutes. Luxury tax example on yachts, private airplanes,expensive cars etc. Who pays the tax? the idea ofthe luxury tax is clearly to tax the rich however wewill see how this is not trueRecall that for luxury items demand is price elastic(mainly because there are alternatives to luxuriesas well as substitutes). Also supply of luxury itemsis usually less elastic because factories thatproduce luxury items often have big overheads andfind it hard to quickly start producing differentgoods.Therefore, sellers will bear the burden of the luxury