Econ 18 - 1 Tax 1 14.01 Principles of Microeconomics Fall...

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4 buyer’s price 3.5 3 2.5 2 1.5 1 0.5 Q Q 1 0 0 4.5 5 D A B C D S’ P 0 P D P S S P 0 1 2 3 4 5 6 7 8 9 10 Q Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Tax 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen October 26, 2007 Lecture 18 Tax, Subsidy, and General Equilibrium Outline 1. Chap 9: Tax 2. Chap 9: Subsidy 3. Chap 16: General Equilibrium 4. Chap 16: Exchange Economy 1 Tax Government imposes a $1 tax on every unit sold (see Figure 1), as discussed in Lecture 17. The buyer’s price is shown on the y-axis. The consumer surplus Figure 1: Tax. and producer surplus both decrease: Δ CS = ( A + B ) , Δ PS = ( C + D ) . Government revenue Δ G = A + C.
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Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 2 2 Subsidy P So the deadweight loss is DWL = B + D. The burden of a tax is shared by consumers and producers; the relative amount borne by consumers and producers depends on relative elasticities of demand and supply. If the demand is inelastic (see Figure 2), 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 S D A B C D P S P 0 P D Q Figure 2: Tax Burden on Buyers, Relative Inelastic Demand Curve. Δ
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Econ 18 - 1 Tax 1 14.01 Principles of Microeconomics Fall...

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