Class02_6 - 02/06/2008 Class Notes (cover part of Chapter 6...

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Class Notes (cover part of Chapter 6 in the textbook) Class Outline Taxation Taxation Taxation creates a wedge between the price consumers pay, p c , and the price sellers receive, p s ! p c = p s + tax p s = p c – tax Taxation can destroy mutually beneficial exchanges! Example : Used Fiat Punto sale. Def. Tax incidence Tax incidence is the division of the burden of a tax between the buyer and the seller. When the government imposes “de jure” a tax on either the seller or the buyer, “de facto” the tax burden may fall on both of them. Example : Tax on cigarettes 1a) Tax on sellers Consider the market for cigarettes. In equilibrium the price per pack of cigarettes is $3 and the equilibrium # of packs of cigarettes is 350 (in millions). Suppose the government imposes a tax of $1.5 on sellers. The minimum supply price increases by the full amount of the tax and the supply shifts left. 1
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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Class02_6 - 02/06/2008 Class Notes (cover part of Chapter 6...

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