AEM 250 Lec 8 Distortionary Taxes 9-13-10 sv

AEM 250 Lec 8 Distortionary Taxes 9-13-10 sv - The art of...

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The art of taxation consist of so plucking the goose to obtain the greatest amount of feathers with the least amount of hissing. - Colbert, Finance Minister to Louis XIV Late 1700’s • “Distortional taxes” reduce efficiency. olbert recognized that we Colbert recognized that we need taxes to fund public items like schools, roads, police, armies. p, – And that this has an effect on net economic surplus. ankiw Principles: Mankiw Principles: #3. Rational people think at the margin. #4 People respond to incentives.
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Net Economic Surplus (NES): MC = MB = 0.75 Q M = 75 o Externality No Externality 00 2.25 2.50 25 1.50 1.75 2.00 U per kL Marginal Private Cost Marginal Benefit 0.75 1.00 1.25 Price $A U 0.00 0.25 0.50 Net economic surplus (NES) = ½ B*H = ½(75*2.25) = $AU 84.375 million 0 25 50 75 100 125 Million kL per Quarter NES = Total Consumer Value – Total Producer Cost
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Introduce a (Distortional) Tax of $AU 0.225/kL 25 2.50 Marginal (Private) Cost 1.75 2.00 2.25 r kL Marginal Benefit arginal (Private) Cost + 1.25 1.50 $AU pe r Marginal (Private) Cost + Marginal Tax A 50 0.75 1.00 Price $ B C E F J K G Note that
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AEM 250 Lec 8 Distortionary Taxes 9-13-10 sv - The art of...

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