Lecture%208%20February%2014

Lecture%208%20February%2014 - Todays agenda Taxes Who pays...

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Today’s agenda Taxes Who pays a tax? When does taxation have an efficiency cost? What makes a good tax base?
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Exam Monday Will not cover Wednesday’s lecture and reading Multiple choice and one or two problems Review session: Sunday night 7:30 p.m. Scott 135 Bring questions
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A typical U.S. resident pays the largest share of her taxes in the form of: A. Sales taxes B. Property taxes C. Excise taxes D. Payroll taxes E. Income taxes
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Who really pays a tax? legal incidence From whom is the tax is directly collected? vs. economic incidence How is the economic burden of the tax shared?
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Who really pays a tax? Economic incidence is not the same as legal incidence because taxes change prices . These price changes can shift tax burdens from buyers to sellers, or vice versa “upstream” “downstream” Today : focus on buyers v. sellers
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Supply curves: the Marshallian view Usual interpretation “When P = c, quantity supplied is d.” Another view “To be willing to supply d, the minimum price suppliers must receive is c.” Q $/Q S c d
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Demand curves viewed the same way Usual interpretation “When P = c, quantity demanded is d.” Another view “The maximum price at which buyers would be willing to purchase the quantity d equals c.” Q $/Q D c d
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Q $/Q S D P* Q* Market equilibrium, à la Marshall Equilibrium occurs at the quantity at which: the maximum price buyers are willing to pay equals the minimum price sellers insist on receiving
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Market equilibrium, à la Marshall Suppose now the government imposes a tax at the rate $ t per unit of output. Now for equilibrium, the quantity traded must be such that : maximum price buyers are willing to pay exceeds minimum price sellers insist on receiving by the tax rate P b -P s = t
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Solving for equilibrium with no tax 28 6 3 10 P 28 6 34 P Q 6 Q 4 24 Q 3 10 Q 34 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + = = + = =
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Solving for equilibrium with no tax 28 6 3 10 P 28 6 34 P Q 6 Q 4 24 Q 3 10 Q 34 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + = = + = =
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Solving for equilibrium with no tax 28 6 3 10 P 28 6 34 P Q 6 Q 4 24 Q 3 10 Q 34 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + = = + = =
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Solving for equilibrium with no tax 28 6 3 10 P 28 6 34 P Q 6 Q 4 24 Q 3 10 Q 34 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + = = + = =
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Solving for equilibrium with no tax 28 6 3 10 P 28 6 34 P Q 6 Q 4 24 Q 3 10 Q 34 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + = = + = =
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Solving for equilibrium with no tax 28 6 3 10 P 28 6 34 P Q 6 Q 4 24 Q 3 10 Q 34 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + = = + = =
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Only at Q = 6 is the maximum price buyers are willing to pay just equal to the minimum price suppliers insist on receiving for that quantity.
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Now impose a tax…
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Equilibrium with a $12 tax 19 3 3 10 P 31 3 34 P Q 3 Q 4 12 12 Q 3 10 Q 34 12 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + + = + = + = =
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Equilibrium with a $12 tax 19 3 3 10 P 31 3 34 P Q 3 Q 4 12 12 Q 3 10 Q 34 12 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + + = + = + = =
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Equilibrium with a $12 tax 19 3 3 10 P 31 3 34 P Q 3 Q 4 12 12 Q 3 10 Q 34 12 P P Q 3 10 P Q 34 P s b s b s b = + = = = = = + + = + = + = =
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Lecture%208%20February%2014 - Todays agenda Taxes Who pays...

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