Taxes - Application: Sales & Excise Taxes Governments...

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    Taxes Governments have two goals when they place a tax  on a good.    Raise Revenues  Discourage use
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    Questions Do taxes discourage consumption? What determines how much consumption  falls? What determines the  economic incidence  of  the tax? (Does the legal incidence matter?) What is the effect a tax on Economic  Efficiency?
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    Analysis Suppose we consider the market for gasoline.  Suppose  there is currently no tax.  Then Supply and Demand  determine the equilibrium: D S Q P Q e  P e
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Suppose a sales tax of $.50 per gallon is placed on sellers  (the gas station would have to pay the government $.50 for  every gallon it sells).  This tax is just like an increase in  costs.  The result is that the Supply curve will  shift straight  up  by the amount of the tax.  The shows that the seller  needs 50 cents more per gallon to be willing to sell the same  amount of gas as before the tax.
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S D Q P $1.40 Q o
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S D Q P $1.40 Q o S T .50
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S D Q P $1.40    Q T     Q o S T   P T
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S D Q P $1.40    Q T     Q o S T   P T So quantity falls.  And price rises.   Thus, the seller is  able to “shift the  burden” of the tax  onto the buyer.
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    But has the price risen by the full amount of the tax ($.50)?
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Taxes - Application: Sales & Excise Taxes Governments...

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