Chapter 7

Chapter 7 - (1) PS=P*-reservation price (of seller) (a) For...

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Chapter 7 A. Incidence of taxation - who is bearing the burden of the tax 1) Motivation 2) Tools a) Elasticity- price elasticity of supply and demand; how sensitive are buyers and sellers with respect to quantity willing to sell (or buy) b) Economic surplus (ES)- the entire benefit to the economy; CS+PS=ES (1) What causes changes in ES? Lower ES, total ES surplus goes down. ES=0, we have no benefit. Higher ES, total ES surplus goes up (2) Suppose that people’s tastes and preferences increase, EEHC, decrease in demand for kumquats will cause CS to _______ and PS to _________ and ES to __________. ^D +Change in CS +Change in PS =ES ^P Bad Good ------------ ^Q Good Good Good Total ? Good Good ii) Consumer surplus (CS)- difference between the price that buyers are willing and able to pay for a good and the actual price that they pay for a good, the net benefit (1) CS= reservation price(of buyer)-P* iii) Producer surplus (PS)- opposite of CS
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Unformatted text preview: (1) PS=P*-reservation price (of seller) (a) For both PS and CS if > or = to 0 then you are rational iv) Government revenue- when we introduce taxes (excise tax (per unit tax)) into the picture, ES changes with this in the equation; ES=CS+PS+government (amount of tax X quantity sold) (1) There are no longer equilibrium prices when taxes are introduced; there are now 2 equilibrium prices (price paid by the buyer and price received by the seller); a dollar spent is a dollar earned means: (a) P* buyer-P* seller = amount of tax v) Deadweight loss- next reduction in economic surplus as the result of the tax (1) DL=f(tax(+), E D (+), E S (+)) (2) Examples 3) Examples a) Who bears the burden of a tax? Reduction in PS and CS, hence both consumers and sellers are affected by the tax. i) Seller always bears cost of shipping. b) How is economic surplus affected?...
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This note was uploaded on 05/09/2011 for the course ECON 2000 taught by Professor Roussell during the Spring '06 term at LSU.

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