Exam 2 Cheat Sheet - Commodity taxes taxes on goods(fuel liquor cigarettes Tax=increase in cost Tax=[Price paid by buyers-price received by sellers

Exam 2 Cheat Sheet - Commodity taxes taxes on goods(fuel...

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Commodity taxes: taxes on goods (fuel, liquor, cigarettes) Tax=increase in cost Tax= [Price paid by buyers-price received by sellers] Taxes and subsidies both create a deadweight loss Buyers pay $.40 x Q2 Sellers pay $.60 x Q2 Tax incidence: who really pays the tax Elasticity of demand: how responsive quantity demanded is to a change in price Buyers pay less than sellers when demand is more elastic An elastic demand curve=demanders have more substitutes You can’t tax someone w/ subs because they’ll buy the substitute Elasticity of supply: how responsive quantity supplied is to a change in price When supply is more elastic (shallow) than demand, suppliers pay less tax than buyers When demand is more inelastic than supply, tax falls more heavily on the buyers If consumers pay 100% of a commodity tax, the commodity has a perfectly elastic supply curve An elastic supply curve=workers can find jobs in another industry If you tax an industry, inputs will escape to other industries {ELASTICITY = ESCAPE} Perfectly elastic=total escape. Seller pays the whole tax. Perfectly inelastic=buyer pays the whole tax Medical care acts: if tax on labor is high, industries have other options (substitute machines, move overseas, close). B/C of low wages, cost of leaving work is higher. So… Demand for labor is higher than supply of labor For workers, elasticity of supply is very low Burden of law falls on workers because low wages Cigarette tax: smokers have perfect inelastic demand b/c its addictive Manager can escape state tax by simply moving states If one tax is higher in one state, lower than other, more people in the low state will smoke, still causing harm Subsidies: reverse tax, government giving money to consumers and producers [Price received by sellers – Price paid by buyers] WEDGE IS PUSHED TO THE RIGHT Whoever bears burden of tax has benefit of sub. ~When supply is more inelastic (steep) than demand, the supplier would have the most benefit from a subsidy ~When demand is more elastic (shallow) than supply , suppliers receive more benefits of the subsidy ~ Benefits of subsidies: wage subsidies increase employment from QM to QS Hiring a low-wage worker is cheaper, increase demand of labor ~Who pays for the subsidies? Tax payers Deadweight loss: non-beneficial trades, the difference of revenue raised by a tax will be less than the loss in welfare of consumers and producers Example) producing baskets when costs exceeds value=waste materials used to create extra baskets have O.C., used elsewhere More DWL, more elastic demand curve LESS DWL, less elastic demand curve NO DWL IF S OR D CURVE IS PERFECTLY INELASTIC TAXPAYERS PAY EVERYTHING FROM THE SUBSIDY!!!

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