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Unformatted text preview: 4. d. Taxes A tax is defined as being a contribution made by individuals, groups, and businesses to support the government of the region within which they reside. Taxes are used by the government to increase revenue for community projects such as streets and schools – all in attempt to better the lives and living conditions of the general public. Taxes can affect both the buyers and the sellers. To begin, we will first consider a tax levied on buyers of a certain good. Say, for example, the government of a small state imposed a $0.20 tax on all candy bars. Since this particular tax affects the buyers, the demand for the good will change; however, the supply will remain the same. true demand curve after tax demand, as seen by sellers OverallPoint: A tax on buyers shifts the demand curve downward by the amount of the tax. Now we will take a look at a tax levied on sellers of a particular good. Continuing the example from before, suppose now that the government decides to require sellers of all candy bars to send $0.20 to the government for each bar sold. In this case, since buyers are not affected by the tax, the demand for the candy bars remains the same. Instead, the supply will change since sellers will want to supply a fewer amount. after tax supply, as seen by sellers true supply curve Overall Point: A tax on sellers shifts the supply curve upward by the amount of the tax. Figure 4.d.1. If 1 candy bar is offered for sale, a buyer will pay $0.60; however, with the $0.20 tax imposed, the seller will take home only $0.40, thus shifting the demand curve down from D to DT. Figure 4.d.2. A tax imposed on a seller raises the cost of selling the candy bar, thus causing the seller to supply less and ultimately resulting in an upward shift of the supply curve by the amount of the tax. The following is an example of a particular good with a $0.08 tax imposed on it. The figure below illustrates the amount of tax paid by the buyers and the sellers as well as the dead weight losses that result....
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.
- Spring '07