# Taxes

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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
• 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
##### 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

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.

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

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

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

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

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