ECON 101 Lecture Notes - Lecture 9: Tax Incidence, Economic Surplus, Deadweight Loss

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6 Feb 2017
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Lec 9 - Taxes
2-6-2017
Tax incidence who pays the tax
Statutory Incidence
o Who is legally responsible for paying the tax to the government
o Who “writes the check”
o Legal requirement
Economic Incidence
o Who actually bears economic burden of the tax
o Consumers: measured by higher price paid for good (lower consumer surplus)
o Producers: measured by lower prices received for the good (lower producer surplus)
Excise Tax not the largest generator of income for the gov (like income)
o Tax levied on a particular commodity
o Can be quantity based
Per Unit Tax most excise taxes are per unit
Examples: gasoline, cigarettes
Simplest form
Lessons learned and analysis apply to other taxes as well
Assume statutory incidence falls on suppliers
o This actually does not matter for determining economic incidence.
A per unit tax increases the “cost of production” by the amount of the tax
o Not really a change in cost of producing the good, the tax is an
arbitrary amount
o Causes the supply curve to shift up by the amount of the tax
o Tax revenue = Tax rate*tax base
Impact on prices
o New price consumers pay (Pc) is HIGHER THAN equilib
price (P*)
o New price suppliers receive (Ps) is LOWER THAN equilib
price (P*)
creates “wedge” btw price consumers pay and price
suppliers receive
No longer Pc = Ps = P*
Gap between price consumers pay and the price suppliers
receive is equal to the tax rate.
Ps = Pc Tax or Pc = Ps + Tax
Impact on quantity and economic welfare
o Quantity transacted (Qt) falls below equilib quantity
o Consumer surplus reduced
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