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Review:Steeper curve: less elastic |Flatter curve: more elastic -More elastic: worse it worksElasticity = quantity / dollars or Qs/ Ed+EsEd= (p / q) / (change in p / change in q)Es= % change in Qs/ % change in pConsumer surplus: the amount a buyer is willing to pay for a good- the amount the buyer actually pays for itProducer surplus: the amount a seller is paid for a good - theseller’s cost of providing it.Chapter 6 Taxes and Subsidies:Commodity taxes:taxes ongoods; raises revenue and creates DWL (reduces gains fromtrade); fuel, liquor, cigarettes; who ultimately pays the tax doesnot depend on who writes the check, it depends on the relativeelasticities of demand and supply. *Same effects whether the selleror buyer is taxed for an item; who pays it is decided by laws ofsupply and demand not by Congress*Tax = Price paid by buyers – price received by sellersWith tax, demand curve shifts down 6.2Wedge shortcut:the most important effect of a tax is to drive a taxwedge between the price paid by buyers and price received bysellers. 6.3*When demand is more elastic than supply, demanders pay less ofthe tax than sellers; when supply is more elastic than demand,suppliers pay less of the tax than buyers*Elasticity = escape;more substitutesif you try to tax an industrywith an elastic supply curve, they will go to another industry;whether they pay more depends who can escape the best.Firms can escape tax but not so easy for workers (sellers of labor).*Free market trade occurs when the buyer’s willingness to payexceeds the supplier’s willingness to sell (demand curve is abovesupply curve), maximizes gains from trade (CS+PS)* 6.5*Elasticity of supply and demand determines DWL of a tax; it’sbetter to tax a good with inelastic demand.*Subsidy:reverse tax; instead of taking money away, thegovernment gives them money; Who gets the subsidy does notdepend on who gets the check from the government, who benefitsdoes depend on the relative elasticities of demand and supply,must be paid for by taxpayers and create inefficient increases intrade (DWL). Same as tax wedge except just push wedge fromright side to left side; buyers are receiving more than sellers arepaying; whoever bears the burden of the tax gets the benefit of thesubsidy*Suppliers receive more of the benefit than the buyers when theelasticity of demand is greater than the elasticity of supply*Subsidy = price received by sellers – price paid by buyersIf a tax causes no DWL, either demand or supply is perfectly IEChapter 7 The Price System:Price is a signal wrapped up in an incentive.Great economic problem:to arrange our limited resources tosatisfy as many of our wants as possible.Speculation:attempt to profit from future price changes.Futures:contract to buy or sell at a specific date in the future asthe price is today. 7.2Prediction markets:a speculative market designed so that theprices can be interpreted as probabilities and used to makepredictions.