Econ 201 1st Edition Lecture 18Outline of Last Lecture 1.government policies~Outline of Current Lecture 1.government policies~Current LectureTax Wedge Approach to Analysis of Simple Tax• Tax rate is a “wedge” between buyer price and seller price: T = PB – PS• Find a value of Q where price on Demand (PB) exceeds price on Supply (PS) by the amount of the tax. This is QT.• Go up from horizontal axis to Supply and Demand to find PS and PB.Analysis for Simple Subsidy• Subsidies are, in a sense, the opposite of a tax. – Use lessons from tax analysis to analyze the impacts of a subsidy. • A tax imposed on sellers raises their cost.– Market effect is shown by shifting the Supply curve upward. • A subsidy paid to sellers reduces their cost.– Market effect is shown by shifting the Supply curve downward. • A tax imposed on buyers reduces the amount they will pay sellers.– Market effect is shown by shifting the Demand curve downward. 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.• A subsidy paid to buyers increases the amount they will pay sellers.– Market effect is shown by shifting the Demand curve upward. Analysis for Simple Subsidy ~ g in $/unit• A tax drives a wedge between PB and PS – Raises the price buyers pay. Lowers the price sellers receive. – The difference is the tax rate: T = PB – PS• A subsidy drives a wedge between PS and PB– Lowers the price buyers pay. Raises the price sellers receive. – The difference is the subsidy rate: g = PS – PB• A tax reduces the quantity exchanged: QT<Q*• A subsidy increases the quantity exchanged:
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