Lecture 8 - Taxes
- Gov’t levies taxes on many goods and services to raise revenue to pay for national defense, public
- Gov’t can make buyers and sellers pay tax
- Tax can be % of good’s price or specific amount for each unit sold
o For simplicity, we analyze per-unit taxes only
- To discourage or encourage certain goods/services
- With this particular tax, who bears burden?
- How does behavior change due to tax supply or demand shift
- How might burden change b/c of assumptions for demand/supply
- Market for Pizza
- Tax on buyers = shifts D down by amount of tax
- Tax is creating a wedge between what the buyer pays and the seller gets
- If tax rate is $1.50 per unit pizza.
- Price buyers pay rises and price sellers receive falls
- Before tax, $10 equilibrium.
- With Tax, buyer pays (in this example) 11.00 but subtract 1.50 to get what seller gets 9.50
- The difference between what buyer pays and seller receive is the tax
- **q: if seller raises price so that they won’t “lose” money, wouldn’t there be no wedge? Just burden
- Incidence of tax: buyers pay $1.00, sellers pay $0.50
Tax on Sellers:
- Like input cost has gone up
- Therefore shift on supply curve to the left, sellers receive $0.50 less
- Again, wedge that is the tax price that buyers pay rises
- Buyers pay rises to $11.00
- The effect is the same in both cases whether tax @ buyer or seller
- What matters is: tax drives wedge between price buyers pay and seller receives
- How does tax incidence change if elasticity of either demand or supply curve changes?
- If demand is inelastic, then burden on buyers
- Example: supply is more elastic than demand
- Demand becoming more vertical, but wedge is larger and incidence of tax is going more towards
buyer. Tax is constant and difference always going to be the same.
- So more of burden going