chap 7b - 10/11/2010 Chapter 7B Elastcity, Taxation, and...

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10/11/2010 1 Chapter 7B Elastcity, Taxation, and Resource Allocation (Taxation and Resource Allocation only for Chapter 7B) Learning Objectives 4. Analyze the effects of various taxes on the supply of or demand for the product taxed and see how taxes alter the allocation of resource the allocation of resources 5. Determine who actually bears the burden of a tax based on the price elasticities of demand and supply for a product
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10/11/2010 2 Taxation ` Excise tax = per unit tax ` Taxes destroy allocation efficiency ` Example: ` Say I’d pay, at most $9,500 for a new car ` Seller would take, at minimum $8,750 for a car ` Exchange is mutually beneficial ` Gov’t imposes a tax of $1,000 per car ` Seller has to charge at least $9,750, and I’m not willing to pay that ± Æ transaction where MV > MC doesn’t take place Tax Wedge ` Taxes place a “wedge” between the price consumers pay and the price the seller receives ` P c = price consumer pays ` P s = price seller receives ` t = tax ` P c = P s + t
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10/11/2010 3 Graph of taxes P S+ tax $9,750 P c = $9,500 $8,750 P s = $8 500 S Tax = $1000 Tax revenue = $18,000 $8,500 D 18 20 Q cars Result of taxes ` Taxes raise the price consumers pay ` (P c > P*) `
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chap 7b - 10/11/2010 Chapter 7B Elastcity, Taxation, and...

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