Lecture 18

# Lecture 18 - ECONOMICS 100A Professor Dan Acland Lecture 18...

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ECONOMICS 100A Professor Dan Acland 10/26/10 Lecture 18 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. TURN IN PROBLEM SET #4 ICLICKER QUIZ ANNOUNCEMENTS 1. Problem Set #5 has been posted. It is due three weeks from today (on Tuesday, November 16 th ). 2. The reading assignment for Thursday (two days from now) has been shortened. Read 24A.3 only. LECTURE Slide : 0. Clarification from the previous lecture: supply and demand both affect all aspects of a tax. Last lecture, I wrote a lot of math on the board. The point of all the complicated math was to see that the tax burden on the producers depends on both the elasticity of supply and elasticity of demand, and the tax burden on the consumers also depends both on elasticity of supply and elasticity of demand. I had a number of students approach me after the lecture and also a number of other students who emailed me, basically saying that it doesn’t seem so on the graph. So I want to go over the graph very quickly and make a general comment on how we should use these graphs. Here is an excise tax in some market for some amount of a product (we’ll call it Q): The tax is per unit, and it is the length of the vertical line between S and D. Are we imposing this tax statutorily? Are we imposing the tax on the consumer or producer? Both, doesn’t matter, who cares. So it doesn’t matter who we impose it on, but it does matter what options people have in the marketplace relative to one another. - Under a tax, If demand becomes less elastic (more inelastic): o Output goes up. o Tax revenue goes up. o Consumers’ share and total amount of tax goes up o Producers’ share and total amount of tax goes down. P Q S D D 1 Consumers’ share Producers’ share P Q S D t Consumers’ share Producers’ share

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ECONOMICS 100A ASUC Lecture Notes Online: Approved by the UC Board of Regents 10/26/10 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2 So this is demand that is less elastic. Here’s what I think a lot of you did. What I think you did is say that the change in demand only changed the demand side of the price line. That’s not the right way to model this. What you need to remember is that the height of the tax wedge doesn’t change, so you have to move the wedge to make it fit in. You have to take the same height and redraw it in a different place. Hopefully you can see how that changes everything. The price that producers pay at the tax is going to go up. The price that consumers pay is going to go up. The chunk of the tax that is paid by consumers, as well as the proportion of
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## This note was uploaded on 02/06/2012 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.

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Lecture 18 - ECONOMICS 100A Professor Dan Acland Lecture 18...

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