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equilibrium2-ho_003

equilibrium2-ho_003 - Quantity Tax Incidence Subsidy...

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Quantity Tax Incidence Subsidy Welfare Effects Case Study Equilibrium Chapter 16
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Quantity Tax Incidence Subsidy Welfare Effects Case Study Competitive Equilibrium: Motivating Questions Firms are ‘price-takers’ in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens to equilibrium price and quantity when either supply or demand changes? comparative statics What are the effects of taxes and subsidies on prices and quantities? What are the welfare effects of taxes and subsidies? deadweight loss, tax incidence
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Quantity Tax Incidence Subsidy Welfare Effects Case Study Taxes Quantity (or excise) tax Effect on p , q Subsidy Incidence Welfare effects
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Quantity Tax Incidence Subsidy Welfare Effects Case Study Quantity Taxes Levied on each unit sold. E.g. gasoline tax: seller sets price at $2.05/gallon and gasoline tax is $0.35/gallon. Consumer must pay p d = 2 . 05 + 0 . 35 = 2 . 40 dollars/gallon Seller gets p s = 2 . 05 Like any tax, this creates a wedge between what consumer pays and what producer receives The $0.35 tax, collected by the govt., is the difference between the consumer price , p d , and the producer price , p s : p d - p s = 0 . 35
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