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Chapter 6

ECON101 Chapter Notes - Chapter 6: Deadweight Loss, Tax Incidence, Avoidance Speech


Department
Economics
Course Code
ECON101
Professor
Corey Van De Waal
Chapter
6

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An unregulated labour market allocates the economy’s scarce labour
resources to the jobs in which they are valued most highly the
market is efficient
The minimum wage frustrates the market mechanisms and results in
unemployment and increased job search
The full loss from the minimum wage is the sum of the deadweight loss
and the increased cost of job search
Everything you earn and almost everything you buy is taxed
Tax incidence: the division of the burden of a tax between buyers and
sellers
When a transaction is taxed, there are two prices:
- the price paid by buyers buyers respond to the price that
INCLUDES the tax
- the price received by sellers sellers respond to the price that
EXCLUDES the tax
Tax incidence and elasticity of demand
- the division of the tax between buyers and sellers depends in part
on the elasticity of demand
- there are two extreme cases:
o perfectly inelastic demand buyers pay the entire tax
o perfectly elastic demand sellers pay the entire tax
In the usual case, demand is neither perfectly inelastic nor perfectly
elastic and the tax is split between buyers and sellers
But the division depends on the elasticity of demand: the more inelastic
the demand, the larger is the amount of the tax paid by buyers
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