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2012.10.04 - Taxes.docx

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Agricultural Economics
AGEC 200
Anwar Naseem

Lecture 8 - Taxes Taxes - Gov’t levies taxes on many goods and services to raise revenue to pay for national defense, public schools - 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 Example: - 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 on Buyer? - 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 Conclusion - 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 Elasticity - 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
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