{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

The fact that demand is so elastic shifts the burden

Info iconThis preview shows pages 40–41. Sign up to view the full content.

View Full Document Right Arrow Icon
- The fact that demand is so elastic, shifts the burden to the sellers, but also supply in this industry is very inelastic (because you have these huge factories for producing yachts, you cannot just start producing something else) therefore the burden on sellers is even larger because they are shouldering most of the burden of this luxury tax. GENERAL CONCLUSION: - Each of the policies in this chapter affects the allocation of society’s resources - Example one: A tax on pizza reduces equilibrium quantity. With less production of pizza, resources (workers, ovens, cheese) will become available to other industries. - Example two: A binding minimum wage causes a surplus of workers, a waste of resources. - A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling is below the equilibrium price, it is binding and causes a shortage. - A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the equilibrium price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment. - A tax on a good places a wedge between the price buyers pay and the price sellers receive, and causes the equilibrium quantity to fall, whether the tax is imposed on buyers or sellers. - The incidence of tax is the division of the burden of the tax between buyers and sellers, and does not depend on whether the tax is imposed on buyers or sellers. - The incidence of the tax depends on the price elasticies of supply and demand. SAMPLE QUESTIONS: 1. If a price ceiling is not binding then there will be no effect on the market price or quantity sold. (This is because if it is non-binding it means that the equilibrium price is below the price ceiling so prices will settle at the equilibrium).
Background image of page 40

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2. If a binding price ceiling is imposed on the computer market, then a shortage of computers will develop (This means the price will be below equilibrium, so there is a gap between the quantity demanded and the quantity supplied, therefore there is a shortage) 3. Suppose that the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames by between $0.50 and $1. (If price went up by $0.50 then it would mean that the sellers and buyers were splitting the tax evenly. However, we are told that buyers are inelastic and sellers are elastic, therefore this means that buyers are going to burden more than half of the tax, therefore more than $0.50) NOTE: The burden of tax does not depend on who is taxed, it depends on the elasticities of each group. The more elastic your behavior the less you get burdened by the tax. The burden of the tax would equally affect the sellers and buyers if they had the exact same elasticity.
Background image of page 41
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}