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Textbook Notes - Oct 19.docx

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Department
Economics
Course Code
Economics 1021A/B
Professor
Michael Parkin

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Nicole Wallenburg
Mr. Parkin
Economics
Oct 17, 2011
Economics Textbook Notes
Taxes
Everything you earn and almost everything you buy is taxed.
Tax Incidence
Tax incidence is the division of the burden of a tax between buyers and sellers.
The price paid by buyers might rise by the full amount of the tax, then the burden
of the tax falls entirely on buyers the buyers pay the tax
The price paid by buyers might rise by a lesser amount than the tax, then the
burden of the tax falls partly on buyers and partly on sellers
The price paid by buyers might not change at all, then the burden of the tax falls
entirely on sellers
Tax on Sellers
A tax on sellers is like an increase in cot, so it decreases supply. To determine the
position of the new supply curve, we add the tax to the minimum price that sellers are
willing to accept for each quantity sold.
Tax on Buyers
A tax on buyers lower the amount there are willing to pay sellers, so it decreases demand
and shirts the demand curve leftwards. To determine the position of this new demand
curve, we subtract the tax from the maximum price that buyers are willing to pay for each
quantity bought.
Equivalence of Tax on Buyers and Sellers
Can we Share the Burden Equally?
o The tax had the same effect regardless of whether it is imposed on sellers
or buyers, So imposing half the tax on one and half on the other is like an
average.
o When a transaction is taxed, there are two prices: the price paid by the
buyer, which includes tax; and the price received by sellers, which
excludes the tax.
Buyers respond to the price that includes the tax
Sellers respond to the price that excludes the tax
The Employment Insurance Tax
o The Employment Insurance Tax is an example of a tax that the federal
government imposes on both buyers of labour (employers) and sellers of
labour (employees)
o The division of the burden of a tax between buyers and sellers depends on
the elasticity of demand and supply
Tax Incidence and Elasticity of Demand
The division of the tax between buyers and sellers depends in part on the elasticity of
demand.

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Description
Nicole Wallenburg Mr. Parkin Economics Oct 17, 2011 Economics – Textbook Notes Taxes Everything you earn and almost everything you buy is taxed. Tax Incidence Tax incidence is the division of the burden of a tax between buyers and sellers.  The price paid by buyers might rise by the full amount of the tax, then the burden of the tax falls entirely on buyers – the buyers pay the tax  The price paid by buyers might rise by a lesser amount than the tax, then the burden of the tax falls partly on buyers and partly on sellers  The price paid by buyers might not change at all, then the burden of the tax falls entirely on sellers Tax on Sellers A tax on sellers is like an increase in cot, so it decreases supply. To determine the position of the new supply curve, we add the tax to the minimum price that sellers are willing to accept for each quantity sold. Tax on Buyers A tax on buyers lower the amount there are willing to pay sellers, so it decreases demand and shirts the demand curve leftwards. To determine the position of this new demand curve, we subtract the tax from the maximum price that buyers are willing to pay for each quantity bought. Equivalence of Tax on Buyers and Sellers  Can we Share the Burden Equally? o The tax had the same effect regardless of whether it is imposed on sellers or buyers, So imposing half the tax on one and half on the other is like an average. o When a transaction is taxed, there are two prices: the price paid by the buyer, which includes tax; and the price received by sellers, which excludes the tax.  Buyers respond to the price that includes the tax  Sellers respond to the price that excludes the tax  The Employment Insurance Tax o The Employment Insurance Tax is an example of a tax that the federal government imposes on both buyers of labour (employers) and sellers of labour (employees) o The division of the burden of a tax between buyers and sellers depends on the elasticity of demand and supply Tax Incidence and Elasticity of Demand The division of the tax between buyers and sellers depends in part on the elasticity of demand. Nicole Wallenburg Mr. Parkin Economics Oct 17, 2011  Perfectly Inelastic Demand  Buyer pays  Perfectly Elastic Demand  Seller pays The more inelastic the demand, the larger is the amount of the tax by buyers Tax Incidence and Elasticity of Supply The division of the tax between buyers and sellers also depends, in part, on the elasticity of supply.  Perfectly Inelastic Supply  Sellers pay  Perfectly Elastic Supply  Buyers pay How the tax is split depends on the elasticity of supply: The more elastic the supply, the larger is the amount of the tax paid by buyers. Taxes and Efficiency A tax drives a wedge between the buying price and the selling price and results n inefficient underproduction.  The price buyers pay is also the buyers’ marginal social benefit  The price the sellers receive is also the sellers’ minimum supply-price, which equals marginal social cost A tax makes marginal social benefit exceed marginal social cost, shrinks the producer surplus and consumer surplus, and creates a deadweight loss. Taxes and Fairness Economists have proposed two conflicting principles of fairness to apply to a tax system:  The Benefits Principle o The proposition that people should pay taxes equal to the benefits they receive from the services provided by governments.  The Ability to Pay Principle o The proposition that people should pay taxes according to how easily they can bear the burden of the tax. Production Quotas and Subsidies Governments often use two methods of intervention in the markets for farm products.  Production Quotas  Subsidies Production Quotas A production quota is an upper limit to the quantity of a good that may be produced in a specified period. If governments introduced a production quota above the equilibrium quantity, not would change because farmers would already be producing less than the quota If governments introduced a production quota below the equilibrium quantity, it has big effects, such as:  Decrease in Su
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