ECON 2010 Lecture Notes - Lecture 14: Tax Wedge, Tax Incidence, Demand Curve

• School: CU-Boulder
• Department: Economics
• Course: ECON 2010
• Professor: Alexander Hill

Document Summary

People buy less or change product if it"s elastic, not much of a change if good is inelastic. What behavior is that illustrating? (dwl = dead weight loss) Less people buying gasoline (deals that could otherwise have been done) Ts = cs + ps + tax revenue (tr) Looking at the graph, cs and ps have decreased and tr increased. Estimate the loss in welfare (ts) from a 3$ gasoline tax. Convert demand and supply equations to inverse form. Graph using y intercept and x intercept. Remember, i can plug q into either supply or demand. Base = y intercept equilibrium p. Height = equilibrium q 0 = 12. Shift so y intercept falls by tax (3$) Follow equil q to 1st demand curve. Calculate pd (plug new q into original demand curve) pd=15. So, who pays the tax (and dwl) depends on elasticity. So the more inelastic curve pays more of the tax.