nlecture14 - government - slides

nlecture14 - government - slides - 2/22/2009 Topic 6:...

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2/22/2009 1 Topic 6: Competitive Markets (3) USC Marshal Government intervention Government intervention • If markets are competitive, they generate the most efficient outcome. So when and why do/should governments intervene in the functioning of markets? Positive: USC Marshal • Externalities, public goods • Imperfect competition Normative: • Equity “negative” • capture Government intervention First: – Types of intervention • General –Taxes and subsidies –Price floors, price supports, production USC Marshal quotas and voluntary production reduction programs • International trade –Tariffs and import quotas Next: – When can intervention be positively warranted?
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2/22/2009 2 Taxes and subsidies Taxes and subsidies: – Drive a wedge between what the consumer pays and what the producer receives – Specific tax: $ amount per unit independent of price USC Marshal – Ad valorem tax: % of price paid – A subsidy: A negative tax – Even if inefficient, the government may need to collect taxes to raise revenue to fund different programs • National security, education, healthcare, social security… Taxes and subsidies Who pays the tax? Statutory incidence: – Who pays the tax: consumer or producer Economic incidence: – How much of the tax burden is actually borne by USC Marshal How much of the tax burden is actually borne by the consumers and the producers • Change in the price faced by consumers • Change in the price received by producers • Statutory incidence is not the same as the economic incidence Taxes and subsidies • Consider a tax T levied on a product: – Then, producers receive P S , consumers pay P B . In equilibrium, P S =P B -T • Three ways to view a specific tax T: – Shifting the demand curve down USC Marshal – Shifting the supply curve up – Using the original demand and supply while solving the quantity for which P S =P B -T
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2/22/2009 3 Taxes and subsidies P D S ...or finding the Q' for which the gap is satisfied USC Marshal Q T P' S P' B Q' P S =P B Q* Taxes and subsidies • Note that with respect to the economic outcome, who actually pays the tax is irrelevant • The economic incidence (who really pays the tax) is determined through the adjustment in the USC Marshal market price and reflects the elasticities of demand and supply • The less elastic demand is, the more of the tax is passed on to the consumers Taxes and subsidies • Some extremes P P T P B P S Tax is fully paid by the consumers T P B P S Tax is fully paid by the producers USC Marshal QQ P P T P B P S (i) perfectly elastic supply (ii) perfectly inelastic supply (iii) perfectly elastic demand (iv) perfectly inelastic demand T P B P S Tax is fully paid by the producers
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2/22/2009 4 Taxes and subsidies • In general, for small taxes, the fraction paid by the consumers is given by S
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This note was uploaded on 04/07/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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nlecture14 - government - slides - 2/22/2009 Topic 6:...

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