lecture_ch07 - THIRD EDITION MICROECONOMI CS Paul Krugman | Robin Wells > Chapter 7 Taxes 1 WHAT YOU WILL LEARN IN THIS CHAPTER The effects of taxes on

lecture_ch07 - THIRD EDITION MICROECONOMI CS Paul Krugman |...

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1 Chapter 7 Taxes >> THIRD EDITION MICROECONOMI CS Paul Krugman | Robin Wells
The effects of taxes on supply and demand in a competitive market What determines who really bears the burden of a tax The costs and benefits of taxes, and why taxes impose a cost that is larger than the tax revenue they raise The difference between progressive and regressive taxes and the trade- off between tax equity and tax efficiency WHAT YOU WILL LEARN IN THIS CHAPTER
3 The Economics of Taxes: A Preliminary View An excise tax is a tax on sales of a good or service. § Examples: Ø An excise tax levied on sales of hotel accommodation (paid by the hotel guest). Ø An excise tax levied on sales of alcohol (paid by the retail shop). Taxes drive a wedge between the price buyers pay and the price sellers receive. § Buyers will have to pay more. § Seller will receive less. The tax incidence is a measure of who bears the burden for a tax (who really pays for the tax).
4 The Supply and Demand for Hotel Rooms S D 0 5,000 10,000 15,000 $140 120 100 80 60 40 20 E B Price of hotel room Quantity of hotel rooms Equilibrium  quantity Equilibrium  price Q Supply  if  price was $60 Q Demand  if  price was $100 A
5 An Excise Tax Imposed on Hotel Owners S 1 S 2 A B 0 5,000 10,000 15,000 $140 120 100 80 60 40 20 Quantity of hotel rooms Price D E Excise tax = $40 per room Supply curve shifts upward by the amount of the tax. The equilibrium price of hotel rooms rises to $100 a night. And the quantity falls to 5,000 Hotel guests bear some of the burden as price RISES from $80 to $100. Hotel owners also bear some of the burden as their price (net of the tax paid) FALLS from $80 to $60. The $40 excise tax is shared between buyers and sellers.
6 An Excise Tax Imposed on Hotel Guests A B 0 5,000 10,000 15,000 $140 120 100 80 60 40 20 Quantity of hotel rooms E S D 2 D 1 Excise tax = $40 per room Demand curve shifts downward by the amount of the tax. Price The equilibrium price of hotel rooms falls to $60 a night. And the quantity falls to 5,000. Hotel guests also bear some of the burden as price RISES from $80 to $100 (after taxes are paid). Hotel owners bear some of the burden as their price FALLS from $80 to $60. The incidence of an excise tax doesn’t depend on who officially pays the tax.
7 Active Learning Practice If Ais the buyer price and Bthe seller price, how large is the per-unit tax imposed on the graph? a)$5b)$10c)$15d)$50e)$1,000 A B 0 100 200 300 $35 30 25 20 15 10 5 E S D 1 Price Quantity
8 The incidence of a tax is a measure of who really pays it.Who really bears the tax burden (in the form of higher prices to consumers and lower prices to sellers) does not depend on who officially pays the tax. Depending on the shapes of supply and demand curves, the incidence of an excise tax may be divided differently.The wedge between the demand price and supply price becomes the government’s tax revenueTax Incidence .
9 An Excise Tax Paid Mainly By Consumers D S $2.95 2.00 1.95 Price of gasoline (per gallon) 0 Quantity of gasoline (gallons) Tax burden falls mainly on consumers Excise tax = $1 per gallon When the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls mainly on consumers.

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