ECON 251 1st Edition Lecture 10Outline of Last Lecture I. TermsII. Homework HelpIII. Agricultural Price SupportsIV. TaxesOutline of Current Lecture I. TermsII. TaxesIII. Extreme CasesIV. QuotasCurrent LectureI. TermsTax Incidence: the division of the tax burden between the buyer and the sellerQuotas: the upper limit on quantity of a good that may be producedDWL: deadweight lossP: priceQ: quanityS: supplyD: demandCS: consumer surplusPS: producer surplusMB: marginal benefitMC: marginal costII. TaxesExample from last lecture:D: Qd = -1/375 P + 43 and 1/3 (P = -375Qd + 16250)S: Qs = 1/125 P -50 (P = 125Qs + 6250)-375Qd +1650 = 125Qs + 6250These 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.Q* = 20P* = 8750Q after taxes = 18Pc = 9500Ps = 8500S + tax = not really a supply shift from S (from a cots perspective – it doesn’t cost more to produce), its just a change from the consumer’s perspective (increase due to the addition of taxes)Between 18 and 20, MB > MC DWL from underproductionDWL = ½(2)(1000) = 1000PRE-TAX:CS pre-tax: ½(20)(16250-8750) = $75,000PS pre-tax: ½(20)(8750-6250) = $25,000Total surplus pre-tax = 100,000POST TAX:CS post tax: ½(18)(16250 - 9500) = $60,750PS post tax: ½(18)(8500 – 6250) = $20,250Total surplus post tax = $81,000Decrease in total surplus of $19,000 1000 DWL18,000 = tax revenuePc = rose by 750Ps = fell by 250 consumers bear more of the burden of the taxRule:Whoever is LESS elastic bears MORE of the burden of a taxLESS ELASTIC DEMANDDifference between Pc and Ps = bigPc rising more than Ps is falling = consumers bear more of the burdenMORE ELASTIC DEMANDPs falls more than the Pc rises = producers bear more of the burdenƐd = 3.6Ɛs = 2.8Ɛs < Ɛd suppliers bear more of the burdenIII. Extreme CasesPERFECTLY INELASTIC DEMANDƐd = 0Consumers bear ENTIRE burdenƐs = 0Sellers bear ENTIRE burdenƐd = ∞Sellers bear ENTIRE burdenƐs = ∞Consumers bear ENTIRE burdenIV. QuotasQuotas: similar to price floor and ceilings, but they are for quantityAt $0.30/lbQs < Qdshortageincrease in priceBetween 200m and 400m MB >
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