econ111_lecture12 - 1 Econ 111 Microeconomics Spring 2009...

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Unformatted text preview: 1 Econ 111 Microeconomics Spring 2009 Lecture 12 Chapter 9: The Analysis of Competitive Markets (2) Heiwai Tang 2 Agenda • Tax • Relationship between elasticities and tax burdens • A precise measure of tax burden – Pass-through fraction • Subsidies • A numerical example of gasoline tax incidence, and the corresponding welfare impact 3 The Effects of a Tax • The government wants to impose a $1.00 tax on cigarettes. It can do it in two ways: 1. Make the producers pay $1.00 for each pack that they make. 2. Make consumers pay $1.00 when they buy a pack at the store. • For case 1 Æ retail price = wholesale price + $1.00. • For case 2 Æ retail price - $1.00 = wholesale price 4 The Effects of a Tax (cont’) • Although in case 1, the producers pay the tax, and in case 2, the consumers pay the tax, • The burden of a tax (or the benefit of a subsidy) falls partly on the consumer and partly on the producer • How the burden is split between the parties depends on the relative elasticities of demand and supply (more below) . 5 Specific Tax • Specific tax = tax of a constant amount (not percentage) per unit sold • Proportional tax = tax of a constant percentage of the price of the good (also called ad valorem tax) 6 Buyers lose A + B Incidence of a specific tax on sellers D S B D A C Quantity Price P Q Q 1 P S price producers get P b price buyers pay Tax = $1.00 Government gains A + D in tax revenue....
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This note was uploaded on 10/11/2009 for the course ACCT 101+ acct 101+ taught by Professor Various during the Fall '09 term at HKUST.

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econ111_lecture12 - 1 Econ 111 Microeconomics Spring 2009...

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