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Intermediate Economics Chapter Fifteen Notes

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ECON 2310
Johanna Goertz

Chapter Fifteen 151152Market Interventionsy Taxes and Subsidies o Economists distinguish between specific taxes and ad valorem taxes A specific tax is a fixed dollar amount that must be paid on each unit bought or sold Excise taxes are also collected on alcohol and tobacco products where they are often referred to as sin taxeso An ad valorem tax is a tax that is stated as a percentage of the goods price Examples of ad valorem taxes include sales taxes value added taxes and goods price An HST is one type of ad valorem taxo The Burden of a TaxIn a perfectly competitive market the burden of the tax is shared by consumers and firmsThe incidence of a tax indicates how much of the tax burden is borne by various market participants Demand is perfectly elastic so that the tax causes no change in the price paid by consumers all of the tax is borne by firms Also when supply is perfectly inelasticWhen demand is perfectly inelastic and supply is perfectly elastic the entire burden of the tax falls instead on consumers Consumers share of tax EsEsEdWhen the demand and supply elasticises are equal in absolute value the quantities demanded and supplied will change by the same amount only if consumer and producer prices change by the same amount Thats why the
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