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microbook_3e-page41 - IJ on sales o It could be a sales tax...

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What is the Cost of Stupidity? x Since a car owner has to wait in line to buy gas, he/she doesn’t just pay the fixed price of gas (denoted: p ) . x For simplicity, we’ll assume that p is the price per tank of gas. x He/She also faces a time cost. But what is the value of time? x An hour of an individual’s time is equal to his/her hourly wage (denoted: w ) . x So if he/she has to wait t hours for a tank of gas x effective price he/she pays per tank is: wt p . . x qty. demanded at effective price equals qty. supplied at fixed price Excise Tax x Now let’s say the government imposes a tax,
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Unformatted text preview: IJ , on sales: o It could be a sales tax of 8.375%. If so: 8.375% p IJ ¡ o It could be a fixed dollar amount – e.g. gas of gallon per $2 IJ o Or it could be a FICA (Social Security) tax on wage income. If so, the wage is the “price” of labor and: 15% wage IJ ¡ x Again, consumers pay an effective price, IJ p . , which: o is greater than market equilibrium price, * p o is greater than price that producers receive, p x Government collects revenue equal to the dollar amount of the tax times the quantity sold Page 41...
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