A tax is a wedge between the price buyers pay and the price sellers receive Consumers reduce quantity demanded in response to the new higher price Producers reduce quantity supplied in response to the new lower price they receive The tax generates revenue size of tax x eq quantity deadweight loss the reduction in total surplus that results from a market distortion Excise tax Tax paid when purchases are made of a specific good ie the tax cid 127 Gasoline Cigarettes How to determine the effects of a tax A market in equilibrium Determine whether the tax will affect the demand or supply of a good Determine how demand or supply is affected Determine the new equilibrium price and quantity A tax on buyers shift the Demand curve down by the amount of the tax The price buyers pay rises the price sellers receive falls equilibrium quantity falls the incidence of a tax The manner in which the birder of a tax is shared among participants in a market Buyers pay a higher price Sellers receive a lower price Statutory incidence refers to who is legally responsible for paying the tax Economic incidence refers to the manner in which the burden of the tax is shared among market participants cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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