L4 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of Microeconomics Professor Jo Hertel Announcement: note exam page Lecture 4: Government intervention (iii): Excise taxes The equivalence of quotas/taxes The incidence of a tax How tax effects vary in different markets Government intervention (iv): Prohibiting markets Elasticity – a useful concept. The price elasticity of demand
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2 Recap & summary: Quotas To achieve quota q m , the government allows exactly q m suppliers into the market. Suppliers will charge consumers p c . The q m suppliers want to enter the market if they get at least p S per unit. Government can charge license fee between 0 and the quota rent – the latter will be our standard case. p q 110 5 15 22 D S p* q* E 1 q m =quota p C quota rent p S
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3 Intermezzo: How fees and taxes affect supply and demand A tax of $10 per textbook sold, to be paid by suppliers: every supplier must receive $10 more to sell his book new Cost $55 Betty $45 Carlos $20 Engelbert $35 Donna $69 Andrew Supply shifts up by $10 Demand remains the same quantity of books 1 2 3 4 5 59 45 35 25 10 price of books demand supply
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4 Intermezzo: How fees and taxes affect supply and demand A tax of $10 per textbook sold, to be paid by consumers: each consumer is willing to hand $10 less to the producer Willingness to pay the supplier $35 Brad $25 Claudia $0 Edwina $15 Darren $49 Aleisha Demand shifts down by $10 Supply remains the same quantity 1 2 3 4 5 59 45 35 25 10 price of books $10
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5 Summary: How fees and taxes affect supply and demand A tax of $t per textbook sold to be paid by consumers shifts the demand curve down by $t at any quantity A tax of $t per textbook sold to be paid by producers shifts the supply curve up by $t at any quantity $t D $t S
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6 Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Government intervention (iii) – taxes An excise tax is a tax per unit sold of a good. An excise tax of $t levied on consumers requires the consumer to pay $t to the government per unit bought.
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L4 - Economics 101:Principles of Microeconomics Professor...

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