ECON101 Lecture 5: Module 5. Social Welfare (4)

• School: University of Waterloo
• Department: Economics
• Course: ECON101
• Professor: Corey Van De Waal

Document Summary

Perfectly inelastic supply: the supply of this good is perfectly inelastic the supply curve is vertical, when a tax is imposed on this good, sellers pay the entire tax. Perfectly elastic supply: the supply of this good is perfectly elastic the supply curve is horizontal, when a tax is imposed on this good, buyers pay the entire tax. Taxes usually are levied on goods/services with an inelastic demand or an inelastic supply. Inelastic demand alcohol, tobacco, gasoline so, the buyers of these pay most of the tax on them. Inelastic supply labour so, the seller (the worker) pays most of the income tax and most of the social security tax. Except in the extreme cases of perfectly inelastic demand or perfectly inelastic supply when the quantity remains the same, imposing a tax creates inefficiency. Ta(cid:454) de(cid:272)(cid:396)eases (cid:395)uantit(cid:455), (cid:396)aises (cid:271)u(cid:455)e(cid:396)"s p(cid:396)i(cid:272)e, and lowe(cid:396)s the selle(cid:396)s" p(cid:396)i(cid:272)e. When marginal social benefit > marginal social cost tax is inefficient.