Exam 2.pdf - Taxes create a tax wedge Who pays for a tax...

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Taxes create a “tax wedge”. Who pays for a tax depends on elasticity of supply and demand, not tax laws. Taxes and subsidies create deadweight losses Simple Tax: $X per unit trades, sales tax are usually percent of price, some taxes are $per unit The party with the relatively more elastic curve pays less of the tax Tequila few substitutes for us consumers/other markets for Mexican producers, consumers pay bigger share Auto parts more substitute suppliers for us companies, few substitute customers for mx firms, mx pays bigger share With perfect elastic demand, seller pays whole tax, perfectly elastic supply, buyer pays whole tax (total escape) perfectly inelastic supply seller pays whole tax, perfectly inelastic demand, buyer pay all tax (no escape-pay all tax) The seller will pay all of the tax when supply is perfectly inelastic, or demand is perfectly elastic Subsidy is reverse tax where govt gives money to consumers or producers S=Price sellers receive-price buyers pay Subsidies must be paid for by taxpayers and create inefficient increases in trade (deadweight loss) When demand is more elastic than supply, suppliers bear more of the burden of tax and receive more of the benefit of subsidy A tax will cause no deadweight loss when s or d is perfectly inelastic, no reduction in quantity traded
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