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Econ Lecture4 - Econ Lecture4 Government policies...

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Econ Lecture4 2/17/11 Government policies: Government can improve market outcomes but often government policies have down side. Taxes -what is the effects of a tax? -How bears the burden of a tax? Tax incidence means how the burden of a tax is shared market participants. *TAX ON SELLER: consider a unit tax= fix dollar amount for each unit sold (Gas, alcohol, tobacco) paid by the seller. In order to figure out that, we use he three steps approach: Which side is effected: 1) Supply side since it was by seller 2) Which direction? supply decreases EX supposes tax =0.5$ see note 1 -Quantity falls :100>90:Taxes discourage economic activity. Tax on buyers: unit tax paid by the buyer for each unit bought 1) Which side? Demand 2) Which direction? Demand decreases(car tax) see not 2 TAX incident and elasticity Tax incident depands on PED and PES Ex case 1 see note 3 This case is when demand is relatively less elastic(stepper)then buyers bear most of the burden of the tax.
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