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Lecture

Oct 24 2013.docx

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Department
Economics
Course
ECO1104
Professor
David Gray
Semester
Fall

Description
ECO 1104 B Oct. 24th, 2013 YUJIE YI #7038840 GET RID OF THE MINIMUM WAGE!  Small business people hate it, claiming that it exacerbates unemployment among the young and the unskilled  Evidence indicates that both sides of the debate are “full of it”  The MW does reduce employment, but only slightly - Workers do not get laid off, but job creation is less than what would otherwise be the case Most MW earners do NOT live in poor families, and thus the program is  poorly targeted  The economist’s prescription: give low income workers direct payments Tax Incidence  Essential issues  It is a little hard  How much revenue will be raised? - Never as much as forecasted because the size of the market shrinks whenever taxes are imposed  1 6   Who really pays the sales tax? - Answer #1: The firm has the LEGAL responsibility for remitting the tax to the government, so one might say fallaciously that firms pay it - Answer #2: Consumers are explicitly charged the tax (at least that is what vendors say), so one might say fallaciously that consumers pay it - BOTH WRONG. In fact, given a normal upward sloping S curve and a normal downward sloping D curve, both parties share the burden of a tax (regardless of the legal framework) once we take into account the change in the equilibrium price  Suppose that a tax is imposed on sellers. Since the firm has the LEGAL responsibility to pay it, its costs of production rise by the amount of the tax  At each possible Qs, firms require a higher price (by the amount of the tax), or at each possible price, they are willing and able to sell less than before the imposition of the tax - $10 per unit in the following example  The S curve shifts up by the full amount of the tax The Tax on Firms (like figure 6.7)  Anew equilibrium price and quantity is established where the new S curve intersects the D curve  The amount of revenue collected is based on a lower Q - Lower Q of 4 multiplied by $10 (the tax per unit) = 40 ECO 1104 B Oct. 24th, 2013 YUJIE YI #7038840 - Major misconception is to estimate revenue based on current sales, which ignores any market response Tax Incidence – like figure 6.7 (2 MIDTERM) - Tax burden: $10/ unit. Customers and producers individually pay half of them. - Producers cannot simply raise the price, unless the demand is totally inelastic.  Consumers pay a higher price - Their share is thus new price minus old price  Producers receive higher price
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