BSL 212 Lecture Notes - Lecture 2: Negative Income Tax, New Product Development, Working Poor
22 Jun 2016
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Tax on a good reduces consumer surplus (by the area b+c) and producer surplus by area d+e) If you need to raise taxes, you should tax things that are inelastic. If you put a specific tax on the seller, it raises the supply curve. If you put a specific tax on the consumer, it lowers the demand curve. It doesn"t matter what the end price is that the consumer and producer are going to pay. In this graph, the tax puts a wedge between the buyer"s price and seller"s price. Price buyer"s pay cost= t (amount of the tax) Revenue from the government (if there"s a tax)= amount of the tax x quantity. Area that represents government revenue: b, d (t x p2) Revenue to a firm= price x quantity. W/ out tax cs: abc (above the price and below the demand curve) W/ tax (price rises to the consumer) cs: a. Ps (below price and above supply curve): f.
