ECO100Y5 Chapter Notes - Chapter 7: Deadweight Loss, Taxation In Canada, Proportional Tax

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The economy of taxes: a preliminary view. An excise tax is a per unit tax on sales of a good or service. The effect of an excise tax on quantities and prices: pre-tax supply curve: s2=s1+t, where t is the amount of tax, price net of tax: pp=pc-t. An excise tax, like a quota, drives a wedge between price paid by consumers and price received by producers, leading to a fall in quantity transacted. However, it doesn"t matter who the government officially asks to pay the tax whether it"s levied on suppliers or consumers the equilibrium outcome is the same. The incidence of a tax is a measure of who really pays it (depending on price elasticities of demand and supply) More specifically, the incidence of an excise tax depends on the price elasticity of supply and the price elasticity of demand. Low price elasticity of demand means few substitutes.

Related Questions

Label each of the following statements about the economics of taxes as true or false.

A) The incidence of a tax is determined by which group (buyers or sellers)
must actually pay the government.

B) When demand is inelastic and supply is elastic, the burden of a tax falls
mainly on producers.

C) When demand is elastic and supply is inelastic, the burden of a tax falls
mainly on consumers.

D) An excise tax can distort incentives and create missed opportunities for
mutually beneficial transactions.

champagnefly512

Politicians concerned with climate change are proposing that a tax on electricity should be implemented with the hope that it will incentivize energy abatement. But they are also want to structure a policy such that it is the producers of electricity that pay the tax, not the consumers. Therefore, they propose a tax of $1/MW h to be paid by the generator of electricity. You have been hired to assess the economic implications of the proposed tax.

After running your econometric modeling, you conclude that the market for electricity is characterized by the following equations:

Demand Curve: P = 40 - 3Qd

Supply Curve: P = Qs

Where P is dollars per MWh and Q is Millions of MWhs.

Part 1: What are the equilibrium price (P) and quantity (Q) with no tax assessed?

Part 2: What will be the equilibrium quantity after the tax is assessed? What is the price that the consumer will pay after the tax is assessed? What is the price that the producer will receive after the tax is assessed?

Part 3: Was the politician successful in reducing electricity usage? If so, by how much?

Part 4: How much tax revenues are raised by the new tax?

Part 5: What is the tax incidence to the consumers?

Part 6: What is the tax incidence to the producers?

Part 7: Was the policymaker successful in assessing the tax on producers, not consumers?

mauvedinosaur490

Suppose you are hired by the Martin guitar company as an economic consultant. You estimate the demand for Martin guitars to be Q = 8000 - 2P. Suppose the supply of Martin Guitars is given by Q = -2000 +3P. What is the equilibrium price of Martin guitars?

What is the equilibrium quantity of Martin guitars?
What is the price elasticity of demand at the equilibrium price and quantity?
What is the price elasticity of supply at the equilibrium price and quantity?
For the next seven questions, suppose a per-unit excise tax of $40 per guitar is levied on the consumers.

What price will sellers receive after the tax is levied?
What price will consumers pay after the tax is levied?
What percent of the tax will be paid by the consumers of Martin guitars? (give an answer between 0 and 100)
What percent of the tax will be paid by the suppliers of Martin guitars? (give an answer between 0 and 100)
How many guitars will be sold after the tax is imposed?
How much consumer surplus do consumers get after the tax?
What is the deadweight loss created by this tax?

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ECO100Y5 Chapter Notes - Chapter 7: Deadweight Loss, Taxation In Canada, Proportional Tax

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