Chapter 8 - ECON 2106 B-C KIM Application: The Costs of...

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ECON 2106 B-C KIM
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Application: The Costs of Taxation [Recall] It does not matter whether a tax on a good is levied on buyers or sellers of the good . . . the price paid by buyers rises, and the price received by sellers falls. How do taxes affect the economic well-being of market participants?
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How a Tax Affects Market Participants [Recall] A tax places a wedge between the price buyers pay and the price sellers receive. Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax. The size of the market for that good shrinks.
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Figure 1 The Effects of a Tax Size of tax Quantity 0 Price Price buyers pay Price sellers receive Demand Supply Price without tax Quantity without tax Quantity with tax The price paid by consumers is higher The price received by firms is lower. And the quantity declines. Who benefits?
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Figure 2 Tax Revenue Tax revenue ( T × Q) Size of tax ( T ) Quantity sold ( Q ) Quantity 0 Price Demand Supply Quantity without tax Quantity with tax Price buyers pay Price sellers receive
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Figure 3 How a Tax Effects Welfare A F B D C E Quantity 0 Price Demand Supply = P B Q 2 = P S Price buyers pay Price sellers receive = P 1 Q 1 Price without tax
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How a Tax Affects Market Participants The change in total welfare includes:
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Chapter 8 - ECON 2106 B-C KIM Application: The Costs of...

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