Intro to Microeconomics_Agnello_Date_032310

Intro to Microeconomics_Agnello_Date_032310 - (Table 1 Tax...

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Other government market effects (distortions) Taxes on goods - Per unit tax - easiest - % tax - harder to deal with because slopes change First show Supply and Demand effects - According to whom the tax is levied (i.e who sends $ to the government) Then after shifting S and D curves - Appropriately observe what has happened to Price and Quantity Effect of P for buyers and sellers called tax incidence (who really pays tax) Major result - The incidence has nothing to do with whom the tax is levied on! - Elasticities of supply and demand really determine who winds up really paying the tax - Great example: - 50 cent tax on ice cream cones - Buyers pay it (levy) - Sellers pay it (levy) P and Q effect will be the same and buyers and sellers will both pay some of the tax The government cannot legislate who really pays S and D (more powerful than the government) Politicians may like to be “fair” about it but the market really determines who ultimately pays (i.e incidence)
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Unformatted text preview: (Table 1) Tax is clearly shared if both supply and demand have similar elasticities What if supply and demand differ a lot with respect to elasticity? Will incidence be similar on suppliers and demanders? General Finding Side of the market with least elasticity (i.e. most inelasticities) bears greatest tax border The least flexible pay most of the tax, the most flexible escape Probably workers bear most of FICA tax - least flexible (Figure 9 in textbook, chapter 6) Why pay luxury taxes? (i.e. yachts and fancy cars) For luxuries D is elastic because buyers don’t need them S is inelastic at least in the short run (yacht makers can’t easily switch to row boats or canoes) Luxury tax incidence mostly on firms (sellers) But firm s a shell- Behind the firm are- Workers- Stockholders These groups hurt by luxury tax. Rich demanders just switch to something else Remember Laws of S and D (economics) determine effects and not government laws...
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Intro to Microeconomics_Agnello_Date_032310 - (Table 1 Tax...

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