But taxessubsidies change incentives and so distort

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Unformatted text preview: ones Class 9 7 2/9/2009 Taxation Applying a $t Sales Tax Market prices can adjust so that Qd = Qs If P is the price at which the good sells, then P+t is the price that the consumer must pay Effectively, we have two prices The price the producer receives, Pp The price that the consumer pays, Pc this determines the quantity supplied this determines the quantity demanded Pp + t = Pc The difference between them is the tax 2/9/2009 Class 9 8 Taxation Applying a $t Sales Tax P Deadweight Loss Pc = Pp + t $t P0 Pp Supply Demand Q1 Qo 2/9/2009 Class 9 Q 9 Observations 1. 2. Imposing the sales tax leads to reduced output Imposing the sales tax generates inefficiency 3. 4. Price that consumers pay rises Output is below the efficient level Consumers are worse off Producers are worse off Class 9 Price t...
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This note was uploaded on 05/16/2010 for the course ECON Section 40 taught by Professor Hogan during the Winter '09 term at University of Michigan.

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