ECON 201 Lecture Notes - Lecture 6: Tax Wedge, Deadweight Loss, Sin Tax
Document Summary
Wedge shortcut- most important effect of a tax is to drive a tax wedge between the price paid by buyers and the price received by sellers: The tax = price paid by buyers price received by sellers: who pays the tax depends on the relative elasticities of supply & demand. When demand is more elastic than supply, demanders pay less of the tax than sellers. When supply is more elastic than demand, suppliers pay less of the tax than buyers w/o tax w/ tax. Farmers are subsidized: transfer payments to buyers / sellers, to increase production and/or consumption, increases supply (ex. Gov"t takes away tax from gd for selling: sellers higher price than buyers are paying, value is less than the cost of making. Increased price to sellers, reduced price to buyers: creates dwl in waste. The subsidy = price received by sellers price paid by buyers. Price received by sellers > price paid by buyers.
