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

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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).
Image of page 2
P S
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern