Providing a summary on Tax Incidence and Elasticity for Unit 7. Including definitions, examples, how to work through questions and detailed summaries and explanations.
·
"tax Incidence" who
=
feels the burden when someone is taxed
> when producer Is taxed, who feels more?Consumer
it or producer?
<this comes down to
elasticity
↳>
elasticity incidence
drives zax
horizontal
elastic- line (demand curvel
-> perfectly
<perfectly inelastic vertical
=
line (demand curves
Whatdoes actually do?> taxes on the producer In
·
tax We are only placing
THIS COUrSe.
< So taxing the market Is observed by a decrease In the supply curve
will See 2 supply curves:one labeled siepply and the orner labeled
supply +
tax, and the verticle distance between these two
curves will show how much tax
was actually Introduced per product
·
by having an Impacton the steepness of demand and supply curves,
&
elasticity is drives
What incidence
tax
> What makes consumers/producers feel ItMore..
·
whether or notone is more elastic or more Inelastic splits the distribution
in a different way
, 1 1
40C
W W
7
90
PrOCUCES
-> this used to be consumer Surplus
·
Demand roughly
curve-
-
45 degree slope
·
Supply Is Steeper than the demand curve
> supply compared to demand Is relatively Inelastic
How to work through thIS:
·
show the old equilibrium
->
which Is at 50 c
·
then find the new equilibrium - 60c
·
to find how much tax has actually been posed on this market:
(Eil
-
go from new equilibrium point, down to oldsupply curve (90)
and that
vertical distance is the actual tax
· :. In this market
the tax Imposed for each sold
unit IS 40C,
this Is very large given the price Is 60C
·
vertical distance between new supply curve and old supply curve gives
you the actual of
amount the tax.
BreakdOWn:
08 4OC,
ENAE
·
How much of that 40c is converted into an Increase In price
Cl
"
- this is called the consumer's share
the consumer was paying 50c and now they are paying 60c,
which means of the 40C, loc was converted into an actual
price change
-
the consumer only reels the price change
> atthis point, the consumer feels a lOc of
out 4OC Increase In
tax which means the tax Incidence In this case Is 25%0f
the tax. (0x100 25)
=
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