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ECON1 - 0420 - 2 Buyer value – seller cost is positive...

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ECON 1 4/20/2009 - excess called excess burden of the tax - excess burden = loss in profits – tax revenue - = 150+150-200 = 100 - Why excess burden? - $20 sellers no longer sell - Some $35 buyers no longer buy - $20 sellers and $35 buyers could mutually benefit from trade. Yet, joint profit not large enough to cover tax, so they don’t trade The definition of Excess Burden - Excess burden = loss in buyers’ and sellers’ profits – government revenue - Also called deadweight loss - A factor to consider in deciding what to tax Two kinds of Potential transactions 1. Buyer value – seller Cost > Tax Tax doesn’t stop this transaction. Reduces profit by the amount of tax
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Unformatted text preview: 2. Buyer value – seller cost is positive but less than tax Could be profitable without tax; will not happen with tax Goods in Inelastic Supply-Labor services?-Savings?-Land Goods in Inelastic Demand-Necessities-Goods with few substitutes-The argument for a broad-based sales tax Subsidies-In November, 2000, Californian’s voted on a school voucher initiative-$4000 for every family that sends a child to a private school-An example of a subsidy, (negative tax)-What will be effects on private school enrollment and tuition...
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