MGEA02H3 Lecture Notes - Lecture 8: Demand Curve, Economic Surplus, Deadweight Loss

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MGEA02 – Lecture 8 Elasticity Tax Incidence and Tax Burden Continued
Incidence of an Excise Tax on Extreme Elasticities
1. Perfectly elastic demand
BS=0
Infinite elastic demand curve
2. Perfectly inelastic demand
No change in quantity
3. Perfectly elastic supply
Quantity change
4. Perfectly inelastic supply
No change in quantity
Excise Burden of an Excise Tax
When a tax is levied it changes the behaviour of the buyers and the sellers
Because gross rice is higher consumers want to consume less
Because net price is lower producers want to supply less
Therefore less output is produced and consumed in the industry
Well-being measure by consumer surplus and producer surplus
Original CS = a + b + c + d
Original PS = e + f + g + h + i
With tax:
CS = a
PS = h + i
Tax revenue = b + c + e + f
Loss to society =d + g
GTS (gain to society) = CS + PS + Tax revenue
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