ECON 2010 Lecture Notes - Lecture 14: Tax Incidence

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26 Feb 2017

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Lecture 14 Notes 2/22/17 – Tax Incidence

Tax Incidence

- Taxes impose costs on both sides of a market

o Ee if uyers do’t had oey oer to the go., they still hae to pay a higher

prices because the supply curve shifts

- Tax incidence (burden of the tax) does not have to be equally placed on buyers and

sellers

- Tax incidence is measured by the change in effective price from pre-tax to post-tax

o Can also be expressed as the fraction of price changes faced by each side of the

market

What determines tax incidence?

- Relative elasticity of one curve compared to the other

- The less elastic curve faces greater tax incidence

- Less elastic means that quantity does not respond to price changes as much

- A small change in quantity corresponds to a larger price change

- If one side of the market is more sensitive to prices (relatively price elastic), more of the

tax will tend to be paid by the other side

Example

- In the short run, electricity generation can be easily changed

- Households tend to mostly ignore energy prices in the short run

- Electricity = inelastic (on the exam)

Relative Elasticity

- Elastiity is related to steepess, ut graphs a e isually isleadig he they do’t

have the same scale, so rely on numbers.

- Relatie elastiity deteries hih side pays more of the tax

Tax Policy

- Often times, the gov. needs to generate tax revenue and has to decide where to get it

from

- Does’t like iposig too uh ost o dead side of arket people ad households

- When might demand be more elastic than supply?

o If firms have a set production capacity and low marginal costs, they will produce

about the same amount regardless of market price

Additional Info

- Equilibrium quantity and effective price are the same no matter which side directly pays

the tax

- The less elastic side of the market faces a greater price change after a tax is imposed

o Tax incidence is greater for less elastic side of market

- Gov. must choose which markets to tax

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ECON 2010 Full Course Notes

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Taxes impose costs on both sides of a market: e(cid:448)e(cid:374) if (cid:271)uyers do(cid:374)"t ha(cid:374)d (cid:373)o(cid:374)ey o(cid:448)er to the go(cid:448). , they still ha(cid:448)e to pay a higher prices because the supply curve shifts. Tax incidence (burden of the tax) does not have to be equally placed on buyers and sellers. Tax incidence is measured by the change in effective price from pre-tax to post-tax: can also be expressed as the fraction of price changes faced by each side of the market. Relative elasticity of one curve compared to the other. The less elastic curve faces greater tax incidence. A small change in quantity corresponds to a larger price change. Less elastic means that quantity does not respond to price changes as much. If one side of the market is more sensitive to prices (relatively price elastic), more of the tax will tend to be paid by the other side. In the short run, electricity generation can be easily changed.

Related Questions

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

coffeeelephant81

QUESTION 25

What will happen in a market where a binding price floor is removed?

	a.	There will be upward pressure on the prices.
	b.	The price or quantity of the product sold in the legal market will not change.
	c.	There will be downward pressure on the prices.
	d.	The products sold will become scarcer.
	e.	There will be increased pressure to buy and sell the good on the black market.

1.05000 points

QUESTION 26

The local bakery calculates the price elasticity of demand for its cinnamon rolls to be â1.25. This tells them that demand is ________ and price is ________ to the buyer.

	a.	perfectly inelastic; everything
	b.	perfectly elastic; meaningless
	c.	elastic; more important than the quantity
	d.	inelastic; less important than the quantity
	e.	unitary elastic; on the same level as quantity

1.05000 points

QUESTION 27

Marginal product is the change in:

	a.	total output minus the change in input.
	b.	total output divided by the change in input.
	c.	input divided by the change in total output.
	d.	total output plus the change in input.
	e.	total output times the change in input.

1.05000 points

QUESTION 28

The government imposes a tax on each plastic bag sold such that the producer of the plastic bags must pay the tax to the government. In the market for plastic bags, the:

	a.	supply curve shifts to the left.
	b.	supply curve shifts to the right.
	c.	demand curve shifts to the right.
	d.	demand curve shifts to the left.
	e.	the supply curve and the demand curve shift to the left.

1.05000 points

QUESTION 29

Pepsi and Coke are considered substitute goods. Because of this, one would predict that, holding all else constant, if the price of Pepsi increases, we would see:

	a.	the demand curve for Pepsi shift to the right.
	b.	the demand curve for Coke shift to the right.
	c.	no change in the demand for Coke.
	d.	the demand curve for Coke shift to the left.
	e.	the demand curve for Pepsi shift to the left.

1.05000 points

QUESTION 30

The government has identified a situation where the production of a good is creating a negative externality. The government should enact legislation to require firms to internalize the externality:

	a.	as long as there are positive health benefits associated with this policy.
	b.	as long as it will not increase the price of the good being produced.
	c.	in all such cases.
	d.	if the benefits of doing so outweigh the costs.
	e.	as long as it will not create unemployment in this industry.

1.05000 points

QUESTION 31

The out-of-pocket expenses incurred in producing a good are also known as:

	a.	wages and prices.
	b.	fiduciary costs.
	c.	explicit costs.
	d.	capital costs.
	e.	implicit costs.

chocolatemule814

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
Provide examples on how the availability of close substitutes affects price elasticity of demand.
Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

ECON 2010 Lecture Notes - Lecture 14: Tax Incidence

ECON 2010 Full Course Notes

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