2016_week5_ECO1010S_dd_ss_inaction_update.pptx

# For example the fuel tax which is a set 23c per litre

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of any good or service regardless of the price. For example the fuel tax which is a set 23c per litre. Why tax? 1. Raise revenue 2. Influence behavior discourage negative behaviour: “sin taxes” decrease Q consumed of the taxed item o health, environmental concerns TAXES : the effect of a “lump sum tax”

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E 0: P =\$3.00 a pack. Q= 350m packs Intro: tax of \$1.50 a pack is introduced. Shifts S curve up by amount of tax “S + tax on sellers” E 0 32 July 1, 2002, New York City imposed a unit tax on the sales of cigarettes of \$1.50 a pack.
E 1 : new equilibrium Market price paid by buyers rises to \$4 Q decreases to 325m packs What do sellers earn ? \$2.50 Division of tax burden: buyers pay \$1 more than at E 0 sellers receive \$0.50 less than at E 0 E 0 E 1 33

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Tax revenue = 325m x 1.50 = \$487,5m 34
Consumer’s burden of tax = 1x325 = \$325 Seller’s burden of tax = 0.50 x 325 =\$162. 50 35

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Evaluating a tax 36 1. Change behaviour aim to ↓ Q 2. Raise revenue Maximise Δ Total Surplus welfare concerns who is actually paying the tax?... Will depend on relative elasticities (shapes of demand and supply curves) What determines the tax incidence? i.e. the division of the tax burden between buyers and sellers What determines the size of the tax revenue received? depends on the relative shapes (elasticities) of demand and supply.
1. Relatively inelastic (vertical) supply D S 0 Q P S 1 50c 20c 60c Deadweight loss ↓ Q produced This is the share of the tax that consumers pay This is the share of the tax paid by seller E 0 E 1 40 Eo: P =50c, Q = 100 Tax (40c) vertical distance btwn S 0 and S 1 Tax revenue: =90*40c = R36,00 90 100 Suppliers do not easily change Q purchased in response to P changes Suppliers pay larger share of tax

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2. Relatively inelastic (vertical) demand D S 0 Q P S 1 50c 40c 80c Deadweight loss ↓ Q produced This is the share of the tax that consumers pay This is the share of the tax paid by seller 41 100 80 Consumers do not easily change Q purchased in response to P consumerspay larger share of tax Tax revenue: =80*40c = R32,00 Eo: P =50c, Q = 100 Tax (40c) vertical distance btwn S 0 and S 1
3. Inelastic supply and Inelastic demand D S 0 Q P S 1 50c 30c 70c E 0 E 1 Tax revenue = 90 *40c = R36 100 90 42 Eo: P =50c, Q = 100 Tax (40c) vertical distance btwn S 0 and S 1

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4. Elastic supply and Elastic demand D S 0 Q P S 1 50c 40c 80c E 0 E 1 Tax revenue = 0.40 x 5 = R2 100 5 43 Eo: P =50c, Q = 100 Tax (40c) vertical distance btwn S 0 and S 1
Q 1 Q 0 D 2 S 1 - subsidy P 0 P 1 D 1 (rands) Quantity P 2 S 1 A SUBSIDY E 1 At original equilibrium: E 0 P 0 = this is the market price, the price both consumers pay and price suppliers receive Q 0 = equilibrium output At new equilibrium: E1 P 1 : this is the new market price that consumers pay Q 1 = increase in output P 2 : this is the price that suppliers are receiving (market price + subsidy) E 0 with subsidies prices decrease for consumers increase for producers Per unit subsidy: P 2 -P 1

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Q 1 Q 0 D 2 S 1 - subsidy P 0 P 1 D 1 (rands) Quantity P 2 S 1 B A D C Original consumer and producer surplus E 0 E 1
Q 1 Q 0 D 2 S 1 - subsidy P 0 P 1 D 1 (rands) Quantity P 2 S 1 B A D C = new consumer surplus New consumer and producer surplus have increased (after subsidy)

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Q 1 Q 0 D 2 S 1 - subsidy P 0 P 1 D 1 (rands) Quantity P 2 S 1 B A D C =new producer surplus New consumer and producer surplus have increased (after subsidy)
Q 1 Q 0 D 2 S 1 - subsidy P 0 P 1 D 1 (rands) Quantity P 2 S 1 A SUBSIDY Total size of subsidy: =(P2-P1)*Q1 E 0 E 1

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