• 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 • ie. the tax• Excise tax- Tax paid when purchases are made of a specific good.• 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.
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