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Lecture 5

ECON101 Lecture 5: Module 5. Social Welfare (3)


Department
Economics
Course Code
ECON101
Professor
Corey Van De Waal
Lecture
5

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5.4 Taxes
Introduction to Taxes
- Income taxes and the social security taxes are deducted from your
pay, and HST (or GST) is added to the price of the things you buy
- Tax incidence: the division of the burden of a tax between buyers
and sellers
- When an item is taxed, its price might rise by the full amount of
the tax, by a lesser amount, or not at all
o If the price rises by the full amount of the tax, buyers pay
the tax
o If the price rises by a lesser amount than the tax, buyers and
sellers share the burden of the tax
o If the price does not rise at all, sellers pay the tax
A Tax on Sellers
- Effects of a tax of $3 per package
o Ex) With no tax, the equilibrium price is $6 per package. A
tax on sellers of $3 per package is introduced supply
decreases and the curve S + tax on sellers shows the new
supply curve
o The new tax will create a divide between the amount that
consumers pay and the amount that producers receive
o The market price paid by buyers rises from $6 a pack before
the tax to $8 a pack after the tax and the quantity bought
decreases
o Buyers pay more, and sellers receive less
- A Tax on Buyers
o The market price received by sellers falls
o The quantity bought decreases
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