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# Chap012 - Chapter 12 Taxation and Income Distribution...

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Chapter 12 – Taxation and Income Distribution Chapter 12 – Taxation and Income Distribution 1. The incidence of the subsidy depends on the elasticities of the supply and demand curves. Here the price received by sellers increases from P 0 to P 1. Buyers also benefit – their price falls from P 0 to P 2 . In evaluating the claims that energy subsidies to low-income families do not benefit industry, the figure below could be modified by shifting the demand curve rather than the supply curve. Nonetheless, what is clear from the diagram is that demand is relatively inelastic, while supply is more elastic. Thus, the subsidies to low-income families do benefit the industry. 2. These reports about demand sensitivity suggest that there is a very elastic demand curve for goods sold over the Internet. Because of this high elasticity, the incidence of a tax levied on Internet sales is primarily borne by producers, not consumers. 3. 43

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Part 3 – A Framework for Tax Analysis 4. One expects that those factors that are used intensively in tobacco production will bear the burden of the tax. Assuming, for example, that tobacco production is capital- intensive, one expects owners of all capital (not just those with investments in tobacco) to bear some of the burden. 5. a. Set 2000 – 200P = 200P, so P = \$5 and Q = 1000 packs b. Consumer price = Producer Price + \$2. Let P be the producer price. 2000 – 200 (P + 2) = 200 P. Producer receives \$4 per pack; consumer pays \$6 per pack. Quantity sold = (200)(4) = 800 packs. Tax revenue = (tax/pack)(no. of packs) = (2)(800) = \$1600. 6. The equilibrium price can be calculated by setting the quantity supplied equal to the quantity demanded: (i) Q D = a - bP (ii) Q S = c + dP If Q D = Q S , then the equilibrium price can be determined as follows: The equilibrium output can be determined by substituting the equilibrium price into either the supply or demand equation.
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