Because there is now a surplus of food the govt buys

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- Because there is now a surplus of food, the govt. buys this surplus of food. They then destroy this food because there is nothing else they can do with it. THE SECOND WAY GOVTS. USE POLICIES TO ALTER THE PRIVATE MARKET OUTCOME: b) TAXES: The govt. can make buyers or sellers pay a specific amount on each unit bought/sold. - The government levies taxes on many goods and services to raise revenue to pay for national defense, public schools, etc. - The government can make buyers or sellers pay the tax - The tax can be percentage of the good’s price, or a specific amount for each unit sold
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A Tax on Buyers (the tax burden falls on the buyers of the good): The tax man makes consumers pay him $1.50 after they have already paid for their good - D1 shows the equilibrium price and quantity, people are willing to buy 500 pizzas for $10.00 each -Tax put in place= $1.50 - Because people are only willing to pay $10.00, then it means that the price of the pizza would have to fall to $8.50 for people to be willing to pay for the pizza still. This is because the $1.50 for tax is now being added, and the highest price buyers are willing to pay is $10.00 (Lets assume that the tax is not included in price and must be paid separately) CONSEQUENCES: 1. The demand curve shifts downwards to the left 2. The new equilibrium price is going to be lower (it is now $9.50) 3. Because the price is now $9.50 and consumers must also pay $1.50, buyers are paying a dollar more than they were before, $11. The incidence of a Tax: How the burden of a tax is shared among market participants - Buyers pay $1.00 more (In total they’re paying $11 instead of $10 now)
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- Sellers get $0.50 less (Because the price is now $9.50 instead of $10.00) A Tax on Sellers: The tax seller is making the seller include the $1.50 tax in the price of the pizza - The tax is going to raise a sellers’ cost by $1.50 per pizza - Sellers will supply 500 pizza but only if the price raises to $11.50 because they now need to compensate for the $1.50 increase in price due to the tax that is now included. CONSEQUENCE: 1. Supply curve shifts up to the left 2. The new price of the pizza is $11.00
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- Before the buyer was paying $9.50 to the pizza seller and then $1.50 to the tax man. - Buyers now pay $11.00 because the $1.50 is now included in price Elasticity and Tax Incidence -The more elastic demand is, the smaller the tax burden on consumers
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-The less elastic demand is, the bigger the tax burden on consumers -This is because it is easier for sellers to leave the market 1. CASE ONE: Supply is more elastic than demand 2. CASE TWO: Demand is more elastic than supply -Consumers behavior is more flexible CASE STUDY: Who pays the luxury tax? - 1990: Congress adopted a luxury tax on yachts, private airplanes, furs, expensive cars. etc
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- Goal of the tax: raise revenue from those who could most easily afford to pay- wealthy consumers - Because the demand for yachts is very elastic (remember: the more elastic demand is, the less the tax burden on consumers) then the tax burden ends up being put on the sellers, because the wealthy will just buy another luxury good rather than a yacht.
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