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Taxation - T axat ion L ect ur e 1 T axes govt levies t...

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Taxation Lecture 1
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Taxes govt. levies taxes on goods and services to raise revenue for national defense, public schools, social security The tax can be imposed on the buyers or sellers For our purposes, we will consider per- unit taxes only
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SUPPLY, DEMAND, AND GOVERNMENT POLICIES 3 S 1 EXAMPLE 3: The Market for Pizza Eq’m w/o tax P Q D 1 $10.00 500
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SUPPLY, DEMAND, AND GOVERNMENT POLICIES 4 S 1 A Tax on Sellers P Q D $10.00 500 S 2 Effects of a $1.50 per unit tax on sellers The tax effectively raises sellers’ costs by $1.50 per pizza. Sellers will supply 500 pizzas only if P rises to $11.50, to compensate for this cost increase. $11.50 Hence, a tax on sellers shifts the S curve up by the amount of the tax. Ta x
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SUPPLY, DEMAND, AND GOVERNMENT POLICIES 5 S 1 A Tax on Sellers P Q D 1 $10.00 500 S 2 450 $11.00 P B = $9.50 P S = Ta x Effects of a $1.50 per unit tax on sellers New eq’m: Q = 450 Buyers pay P B = $11.00 Sellers receive P S = $9.50 Difference between them = $1.50 = tax
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SUPPLY, DEMAND, AND GOVERNMENT POLICIES 6 S D 1 $10.00 500 A Tax on Buyers The price buyers pay is now $1.50 higher
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