DOC PREVIEW
UNC-Chapel Hill ECON 101 - Chapter 6 copy

This preview shows page 1-2-3 out of 9 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 9 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Lecture Outline – Taxes and Subsidies1. Analyzing the Impact of a Tax· What is a tax?o burden of the tax: the max is imposed on both consumers and pro-ducers· Consider the impact of a tax that is imposed on sellers. Use a graph to ex-plain how a tax affects:•$1 tax on the sellers - raises the marginal cost of the seller. At each and every quantity, the marginal cost of production will rise by the cost of the taxo There is a surplus, market price will fall and then the price will re-turn to equilibriumo Price represents the price the firm will charge to the consumer.o Tax will reduce the equilibrium quantity of unitso The minimum amount the sellers are willing to receive for each unitsold?1o The net price that the seller receives? The net price is the price that the seller gets to keep after they pay the tax to the govern-ment?o The price that the consumer has to pay the seller?o How is the tax burden (i.e. incidence of the tax) distributed? In other words, how much of the tax does the buyer pay and how much of the tax does the seller pay?o The number of transactions (i.e. equilibrium quantity)?· Consider the impact of a tax that is imposed on consumers. Use a graph to explain how a tax affects:o The maximum amount the consumers are willing to pay the sellers for each unit purchased? If the tax is $1, they will only be willing to pay $1 less than what they would normally pay. Tax on buyer=reduce the amount they are willing to ay to the seller by the value of thetax.· There will be a shortage, price will rise until the quan-tity demanded is = the quantity supplied2· Quantity that buyer is willing to purchase, falls .· Consumer would pay producer surplus plus the amount of the tax· Consumer ends up paying more than they would with-out tax and seller receives less than they would with-out the tax = Burden of the taxo The total price that the consumer has to pay for the good? This price would include the amount they pay to the seller plus the tax.o The net price (i.e. after-tax price) that the seller receives from the consumer? o How is the tax burden (i.e. incidence of the tax) distributed? In other words, how much of the tax does the buyer pay and how much of the tax does the seller pay?o The number of transactions?· Tax wedgeo Difference between what the buyer actually pays minus the amountthe amount the seller receives= amount of the tax3o Look in the demand and supply curve where the value is equal to the taxo Explain why who ultimately pays the tax does not depend on who writes the check. Consumer pays more than they otherwise would and buyer receives less than they otherwise would.o Use a tax wedge to analyze the impact of a tax.· How does a tax affect consumer surplus? Producer surplus? Government revenue? Total surplus? Identify these areas on a graph before and after a tax is implemented.o CS: Below the demand curve and what the consumer actually pays.o PS: Difference between price which the seller receives and the sup-ply curveo Government Revenue: Area between what the producers pay and what the buyers payo Total surplus is lost.4o What is a deadweight loss? Why does a tax create a deadweight loss? Deadweight lost: total surplus is lost due to tax. Unrealized transactions. Tax put a wedge between what the buyer pays and seller receives .As a result, can’t take advantage of transactions which would have happened had the tax not been imposed.· Difference in total surplus that you have with tax rela-tive to maximum surplus you would have had without the tax.· Tax wedge area· Price Elasticities, Tax Burdens, and DWLo How does the price elasticity of demand and the price elasticity of supply affect the tax incidence? Inelastic demand curve: takes on more of the tax burden Elastic demand: takes less of the tax burden If both supply and demand are equally elastic there will be a large decrease in quantity supplied and demanded due to thetax.o How do price elasticities affect the size of the DWL that is created by the tax? The more elastic the more the DWL DWL will be smaller if demand and supply are fairly inelastic and vice versa. If both curves are fairly elastic, and price elasticity of demandis smaller than elasticity of supply, it will be the consumers that pay more of the tax. (smaller = more inelastic)2. Analyzing the impact of a Subsidy5• What is a subsidy? Reverse tax. Government pays for the consumption or produc-tion of a prduct. Subsidy wedge= difference between demand and supply curve will be equal to the quantity• Consider the impact of a subsidy that is given to sellers. Use a graph to explain how a subsidy affects:• Subsidy lowers the price the consumer pays. Subsidy will increase the price the seller will receive. Subsidy reduces marginal cost of production causing the supply curve to shift down by the value of the subsidy.o The minimum amount the sellers are willing to receive for each unitsold?o The net price that the seller receives? The net price is the price that the seller gets to keep after the consumer pays them and they collect the subsidy?o The price that the consumer has to pay the seller?6o How is the subsidy distributed? In other words, how much of the subsidy does the seller receive and how much of the subsidy does the buyer receive?o The number of transactions?• Consider the impact of a subsidy that is given to consumers. Use a graph to explain how a subsidy affects:•o Buyers willingness to pay will increase. Willing to pay $5 more ateach and every quantity. This will shift the supply curve up.o The maximum amount the consumers are willing to pay the sellers for each unit purchased?o The price that the seller receives from the consumer? o The out-of-pocket price that the consumer has to pay for the good? This price is the price that the seller receives from the consumer less the amount of the subsidy.o How is the subsidy distributed? In other words, how much of the sub-sidy does the seller receive and how much of the subsidy does the buyer receive?o The number of transactions?• Subsidy Wedge7o Explain why who ultimately receives the subsidy does not depend on who gets the subsidy check from the government.• Because the outcome is the same.o Use a subsidy wedge to analyze the impact of a subsidy.• How does a subsidy affect consumer surplus? Producer surplus? The Govern-ment? Total surplus? Identify these areas on a graph before and after a sub-sidy is


View Full Document

UNC-Chapel Hill ECON 101 - Chapter 6 copy

Download Chapter 6 copy
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Chapter 6 copy and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 6 copy 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?