Chapter 4 Applications (1)

Chapter 4 Applications (1) - Applications Chapter 4 Link...

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Applications Chapter 4 Link between product & resource markets Tax incidence Price controls/black markets Application: hurricanes
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Product / Resource Markets Linked Businesse s or Firms Households Product Markets Resourc e Markets Supply Demand Supply Demand Land-rent Labor-wages Capital-interest Entrepreneur- profit Resources derive their demand from the value of the products they effect Household income from supplying resources used to demand products
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Tax Incidence or Tax Burden Who ultimately pays the tax? P Q Again, consider a $10 tax on textbooks that sellers are legally required to collect for the State. Textbook Market S S+t Again, initial analysis suggests that buyers and sellers/owners share the tax in some proportion, even though sellers are required to collect the entire tax. Also, note less trades occur with tax. $100 $107 $97 D $10 tax In this case, the buyer/consumer is shown to incur a greater tax burden ($7 of the $10). This results from the relative difference in elasticity between Demand and Supply (see slides on elasticity).
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Tax Incidence if buyers initially pay the tax: Who ultimately pays the tax now? P Q Ceteris paribus, what is the tax incidence if, rather than sellers, the buyers are legally required to pay the $10 tax? Textbook Market S $10 tax $100 $107 $97 D+tax Show the impact of the tax imposed on buyers. (Again, what does the height of the demand curve reflect, and how do we show the impact of the $10 tax on demand? Why is the new D $10 vertically below the old D?)
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