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Intros
Lessons
  1. Taxes Overview:
  2. Tax Incidence
    • The division of tax burden
    • 3 Cases
  3. Effects of Taxes
    • Taxes on Sellers
    • Taxes on Buyers
    • Conclusion
  4. Tax Incidence and Elasticity of Demand & Supply
    • Perfectly inelastic demand curve
    • Perfectly elastic demand curve
    • Perfectly inelastic supply curve
    • Perfectly elastic supply curve
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Examples
Lessons
  1. Understanding Effects of Taxes on Buyers and Sellers
    You have the following information:

    Chocolate bars (dollars)

    Quantity demanded (thousands per day)

    Quantity Supplied (thousands per day)

    1

    6

    4

    2

    5

    5

    3

    4

    6

    4

    3

    7

    5

    2

    8

    1. If chocolate bars are not taxed, what is the price of a chocolate bars and how many are bought?
    2. If sellers are taxed $2 dollar a chocolate bar, what is the price? How many are sold? Who pays the taxes?
    3. If buyers are taxed $2 dollar a chocolate bar, what is the price? How many are bought? Who pays the taxes?
  2. The demand function for laptops is P = 300 - 2Q, and the supply function is P = 100 + 3Q.
    1. If laptops are not taxed, what is the price of a laptop and how many are bought?
    2. If sellers are taxed $10 dollar a laptop, what is the price? How many are sold? Who pays the taxes?
    3. If buyers are taxed $10 dollar a laptop, what is the price? How many are bought? Who pays the taxes?
  3. Understanding Tax Incidence and Elasticity of Demand & Supply
    Suppose the demand curve for candy is perfectly inelastic, and a tax is imposed.
    1. Illustrate this in a graph.
    2. Who pays the taxes?
  4. The demand curve is perfectly elastic, and the supply curve is perfectly inelastic. Suppose the equilibrium price is $5, and the equilibrium quantity is 100.
    1. Illustrate this in a graph.
    2. What happens when a $1 tax is imposed? Who pays the taxes?
Topic Notes
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Taxes


Tax Incidence: the division of tax burden between buyers and sellers.


When a good is taxed, then 3 things could happen:
  1. Price rises by the full amount of the tax.
    -\quad Buyers pay the tax
  2. Price rise by a lesser amount than the tax
    -\quad Buyers and sellers share the burden of the tax
  3. Price does not rise
    - \quad Sellers pay the tax

Effects of Taxes


Taxes on Sellers: Sellers treat taxes the same as an increase in production cost, so it shifts the supply curve leftward.

Effect of taxes on sellers increase production cost

Conclusion: Buyers end up paying more because of tax, and sellers receive less money. There is deadweight loss.


Taxes on Buyers: Taxes make the item more expensive, so less people want to buy it. This causes the demand curve to shift leftward

Effect of taxes on buyers increase item price

Conclusion: Buyers end up paying more because of tax, and sellers receive less money. There is deadweight loss.


Tax Incidence and Elasticity of Demand & Supply


For a perfectly inelastic demand curve, buyers pay all the taxes

Tax incidence for a perfectly inelastic demand curve

For a perfectly elastic demand curve, sellers pay all the taxes

Tax incidence for a perfectly elastic demand curve

For a perfectly inelastic supply curve, sellers pay all the taxes

Tax incidence for a perfectly inelastic supply curve

For a perfectly elastic supply curve, buyers pay all the taxes

Tax incidence for a perfectly elastic supply curve