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Lecture

taxation 5 sales taxes.doc

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Department
Business
Course
BU357
Professor
Irene Cheung
Semester
Fall

Description
Principles of Microeconomics Sales Taxes and SubsidiesSALES TAXESOur understanding of elasticity will help us analyze the impact of sales taxes or subsidies on equilibrium price and quantity1Per Unit TaxThe simplest sales tax is a fixed tax per unit sold regardless of the price or quantity of the units soldWhether sellers or buyers collect the tax for remission to the government is irrelevant to the impact of the tax on buyers and sellers but we will assume that sellers collect the tax since this is the more common occurrence due to the greater ease of remissionSince the sellers impose the tax on each unit sold the sellers add the amount of the tax to the price of each unit soldThis means that the supply function shifts up by the amount of the tax If the equation for supply was PsSQ the PsTSQ where TtaxunitTaxegSuppose P84003Q and P26002Q describe the market for opera tickets per day Initial Equilibrium84003Q26002QQo1160 and Po4920What is the effect shortrun of a tax of 12unit Supply P1226002QAfter Tax Equilibrium84003Q38002QQ920 and P564011Total Tax RevenueTaxunitQ3110033001NOTE The equilibrium price after the tax increased by 72056404920 not 12A graph of these equilibria helps us understand why Graph the aftertax equilibrium by shifting up the supply curve by the amount of the tax Indicate the original price plus the tax P on the vertical axis and shift supply up at Qo by this 0T 1
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