Gov. Policies

Gov. Policies - Taxes and Tax Incidence I Sales(consumption...

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Taxes and Tax Incidence I. Sales (consumption) tax Here the price paid by the buyer (P B ) must differ from the price received by the seller (P S ) by the amount of the tax ( \$ t). A tax does not alter the buyer’s willingness-to-pay for the g/s. It is the price of the good which will change and not the consumer’s preference for that g/s. Thus, the Demand curve that sellers face, shifts down by the amount of the tax. The buyer is still willing to pay the same amount for a given quantity, but now some of that payment must go to the government. So the amount buyers are willing to pay the sellers is less. The D-curve that the sellers face is lower by the amount of the tax that must go to the government. P S P B a P * c b P S d D D t Q t Q * Q

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A. Tax Incidence 1. The loss to C.S. is the area between P B , a, b, and P* 2. The loss to P.S. is the area between P*, b, d, and P S B. Tax Revenue = tax per unit ( \$ t) times the number of units sold with the tax (Q t ). This is equal to the area between P B , a, d, and P S C. The DWL of the tax is the area between a, b, and d. II. Production Tax – suppliers must pay the government \$ t per unit that they produce; this raises their MC of production, and raises the minimum amount they must be compensated by consumers to sell a given quantity. Thus the supply curve that consumers face decreases (shifts left).
P S

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• Summer '07
• MERTENS,WI

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