ECON 1B03 Lecture Notes - Lecture 8: Tax Incidence, Income Tax, The Intercept
10 Jun 2018
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Price Floors can lead to
- Surplus Production
o Surpluses may be stored, destroyed, exported, given away
o Can sell surpluses on the domestic market or selling price will fall below the floor level
- Inefficient allocation of sales
o Those willing to sell the good at a loe pie ae’t alas the oes that aage to sell
it
- Wasted resources
o Firms may spend a lot of time and money trying to sell their surpluses
- Inefficiently high quality
o Fancy packaging, added bells and whistles to make the good really attractive to
osues ho’d e happ to pa less fo highe ualit ehadise
- Illegal activities
o Selling goods at a lower than floor price just to get rid of inventory
Government Policies: Sales Taxes on Consumers
Sales Tax
- Governments levy (impose) taxes to raise revenue for public projects
- Ioe ta is thei lagest soue of eeue, ut that’s a ao topi
- In micro, we look at sales taxes on goods and services
- Do buyers or sellers bear the burden when the government imposes a tax?
o Tax incidence: is the distribution of a tax burden
A Tax on Consumers
- Example: The Market for Chicken Wings
- In a busy subdivision, a local sports bar faced demand for chicken wings (sold by the pound)
given by
o Qd = 100 - 5P
o Qs = 10 + 10P
In eqm, Qd = Qs
P = $6 / pound
Q = 70 pounds
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Surplus production: surpluses may be stored, destroyed, exported, given away, can sell surpluses on the domestic market or selling price will fall below the floor level. Inefficient allocation of sales: those willing to sell the good at a lo(cid:449)e(cid:396) p(cid:396)i(cid:272)e a(cid:396)e(cid:374)"t al(cid:449)a(cid:455)s the o(cid:374)es that (cid:373)a(cid:374)age to sell it. Wasted resources: firms may spend a lot of time and money trying to sell their surpluses. Inefficiently high quality: fancy packaging, added bells and whistles to make the good really attractive to (cid:272)o(cid:374)su(cid:373)e(cid:396)s (cid:449)ho"d (cid:271)e happ(cid:455) to pa(cid:455) less fo(cid:396) highe(cid:396) (cid:395)ualit(cid:455) (cid:373)e(cid:396)(cid:272)ha(cid:374)dise. Illegal activities: selling goods at a lower than floor price just to get rid of inventory. Governments levy (impose) taxes to raise revenue for public projects. I(cid:374)(cid:272)o(cid:373)e ta(cid:454) is thei(cid:396) la(cid:396)gest sou(cid:396)(cid:272)e of (cid:396)e(cid:448)e(cid:374)ue, (cid:271)ut that"s a (cid:373)a(cid:272)(cid:396)o topi(cid:272) In micro, we look at sales taxes on goods and services.
