Taxes - Welfare Economics

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Taxes

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Notes:

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
  • Intro Lesson
    Taxes Overview:
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Taxes

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