ECON 1000 Lecture Notes - Lecture 9: Tax Wedge, Economic Surplus
11 Apr 2016
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Difference between what paid and what seller receives. Before: price and what received the same (pb=pb) Doesn"t matter who imposes on, same wedge created. Only depends on relative elasticity of supply and demand. The more inelastic something is, the higher proportion of tax it pays. Always: equilibrium quantity falls (sometimes why taxed, like cigarettes) When impose tax, gov"t gets revenue (tax wedge) times qualtity. Reduce producer and consumer surplus (benefits to both) But collected tons of tax revenue and presumably spends on beneficial things. Much of loss offset by tax revue (of benefit to somebody) but lost opportunities (c and e: triangle before intersection of supply and demand) tax prevents higher equilibrium (efficiency cost) At now only want to consume 75. Produced surplus (200- 0) (100-0)/ 2 = 10,000. Consumer and producer surplus (400-250)(75-0) = 18,750. Elasticity of supply and demand: measure how much quantity supplied and demanded respond to changes in price.
