TEST 2 CHEAT SHEET pDF.pdf - Chapter 6 Taxes and Subsidies ELASTICITY = ESCAPE-Taxes create a “tax wedge.” Who pays a tax depends on the elasticity

TEST 2 CHEAT SHEET pDF.pdf - Chapter 6 Taxes and Subsidies...

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Speculation Now Next Month P 1 P P 2 P Q Q D D S S S’ S’ P 3 P 4 Speculation can narrow price fluctuations. Lost Value Now Gained Value Next Month Chapter 6: Taxes and Subsidies ELASTICITY = ESCAPE !! -Taxes create a “tax wedge.” Who pays a tax depends on the elasticity of supply and demand, not on tax laws Taxes and subsidies create deadweight losses (size of DWL depends on the elasticity of supply and demand. -Simple tax ($1 per pound of tofu), sales tax (5% sales tax), and some taxes are $ per unit (gas, alcohol) -It doesn’t matter if you tax the buyer/seller, outcome is the same -Ex of a major type of tax that is NOT tied to a transaction… property tax bc it is based on the value of the house -graphs: where wedge hits demand curve is price buyers pay, where wedge hits the supply curve is the price sellers RECEIVE, the box is how much the government receives -Who (really) pays the tax is called TAX INCIDENCE (who is hurt the most from the taxes) -Price always goes up by less than the tax. the more elastic, you escape the tax/pay less -Few substitutes, more inelastic on demand, and other markets for the product then US consumers will pay a bigger share -PRICE = WAGE. More sub. Firm escape this by outsourcing & firing. Inelastic, workers are paying more for insurance, workers can’t do much to escape. -The seller will pay all of the tax when supply is PERFECTLY INELASTIC, or demand is PERFECTLY ELASTIC. -A subsidy is a reverse tax where the government gives money to consumers (or producers). Subsidy=price received by sellers – price paid by buyers -Who benefits from the subsidy does NOT depend on who receives the check from the government. Who benefits from the subsidy DOES depend on the relative elasticities of demand and supply. Subsidies must be paid for by taxpayers and they create inefficient increases in trade (deadweight loss). -When demand is more elastic than supply, suppliers bear more of the burden of a tax and receive more of the benefit of a subsidy. Inelastic helps/gains most from subsidy/the side that pays the tax benefits. -DEADWEIGHT LOSS : taxes raise revenue for government and reduce welfare for consumers and producers. The revenue raised by a tax will be less than the loss in welfare of consumers and producers.. -TAXES CREATE DWL BECAUSE…. THEY REDUCE THE EFFICIENT QUANTITY/IT’S A LOW EQUILIBRIUM -Taxes on something broad is better because with specific taxes people will find ways to get around it -ELASTIC= BIG DWL ….. INELASTIC = TAX MARKET IS BETTER, LESS DWL!! -When will a tax cause no deadweight loss? When S or D is perfect inelastic -Sufficiently high taxes may lead to illegal or “black market” sales -TAXES AND SUBSIDIES AMOST ALWAYS CREATE A DEADWEIGHT LOSS… THE SIDE WITH THE MORE INELASTIC CURVE PAYS THE MAJORITY OF THE TAX Chapter 7: Price System; Signals, Speculation, and Prediction -“a price is a signal wrapped in an incentive” - prices, represent the “collective wisdom” of participants, they “signal” or covey valuable info about where resources are more needed and less needed
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