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Unformatted text preview: ECONOMICS 100A Professor Dan Acland 10/21/10 Lecture 17 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. iCLICKER QUIZ ANNOUNCEMENTS 1. Problem Set #4 is due next Tuesday, October 26. a. Don’t do 18.9A.g. It has to do with the political reaction to some policy, and that relates to part of the reading that I didn’t assign. 2. There will be a quiz next Tuesday. (Game theory is too important to skip the quiz.) LECTURE In the last lecture, I said that this model of markets is not a very useful tool if your goal is to take an ideological stand and defend it with microeconomic theory. I want to reiterate that you should feel free to take whatever ideological stand you want, but you should be very careful before you choose to defend your ideological stand with economic theory. Nothing is more dangerous in the political realm that knowing a little economics. However, I then said that even though there are problems with this model that make it not perfect and not something you can really draw solid ideological lessons from, it is nonetheless a very powerful analytical tool if your goal is to get a rough idea of the impact of government policy or non- government activity. You can frequently get an idea of what direction things will move, and you can actually sometimes get a not-so-terrible approximation of the actual relative weight of the pros and the cons. You can add up social surplus and see if it goes up on net or down on net. If it goes up or down hugely, you can be fairly sure (or at least moderately confident) that the policy you are evaluating is not such a great idea, or that it will be very costly. But you want to be very careful before you draw any very precise conclusions. So my hope is that today, we will go straight into looking at the nuts and bolts of how this model uses mathematical and analytical tools, and maybe even get a sense of its usefulness, even though it is a rough approximation. Slide : Lecture outline: 1. Does it matter who pays a tax? 2. What determines the elasticities of demand and supply? 3. Elasticity and taxation: why should we care? 4. The math of tax incidence. 5. Hidden deadweight loss: the special case of labor supply. Slide : 1. Does it matter who pays a tax? The first thing we’ll look at is who pays the statutory incidence of the tax. You know from the book that the statutory incidence of the tax simply means who is legally obligated to send the check to the government, or who we say (in the law) is responsible for the tax. Obviously with sales tax, you don’t actually send in the tax. But it’s clear that you don’t actually send in the tax....
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