2.15.10, Lecture Notes, Econ 201

2.15.10, Lecture Notes, Econ 201 - o Demand curve is...

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2.15.10, Lecture Notes, Econ 201 When a unit tax is put on a competitive item the price will go up, but not by the price of the tax.  What determines how much the price goes up?  The relative price elasticity’s of demand and supply RELATIVE EFFECTS ON BUYERS AND SELLERS - “The only way to avoid a tax (legally) is to change your behavior” o Buy Less o Buy in a Different Location - The more buyers or sellers are willing to change, the less of the tax burden they bear o If demand relatively more price elastic, sellers bear a greater burden o If supply is relatively more price elastic, buyers bear a greater burden SPECIAL CASE: CITY GASOLINE TAX - Tax on gas sales in one city - Demand is very (maybe perfectly) elastic o Consumers can easily buy gasoline in neighboring cities (substitute)
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Unformatted text preview: o Demand curve is horizontal WHAT IF THE TAX IS COLLECTED FROM BUYERS?-No difference in results-Shift demand down by the amount of the tax o Two prices, including and excluding the tax -Important Policy Result: in a competitive markets, it does not matter whether an excise tax is formally ANGEL INCIDENCE SUMMARY: PARTIAL-EQUILIBRIUM COMPETITIVE MARKETS-Burden is distributed btw buyers and sellers-The distribution of burden depends on the relative price elasticity’s of demand and supply-The more an economic agent is willing to change behavior, the more the tax burden can be avoided o Agents with relatively inelastic demand or -ANGEL SPECIAL CASE: LAND TAX-Tax on land in a given jurisdiction (location)-Supply is perfectly inelastic -...
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