ECON 101 Lecture Notes - Lecture 10: Economic Equilibrium, Flat Tax, Economic Surplus

• School: U of M
• Department: Economics
• Course: ECON 101
• Professor: Chris Proulx

Document Summary

Market forces operate so that price and quantity move towards the equilibrium. The market does many things: pricing, quantity, allocation and production, efficient rationing, incentives. Specific (quantity) tax tax per unit: price demanders pay: pd, price suppliers receive: ps, before tax: p = pd = ps, after tax: pd = ps + t (tax) Tax incidence how the burden of a tax is distributed between buyers and sellers. A tax causes the price consumers pay to increase and at the same time the price producers get to decrease drives a wedge between pd and ps. Supply curve shifts up by the amount of the tax. Price suppliers keep = price paid tax: p" = old equilibrium price, incidence on buyers = pd p", incidence on sellers = p" ps. Tax something, and the equilibrium quantity becomes lower. Sin tax discourages consumption and boosts government revenue. Deadweight loss the cost of the economic inefficiency caused by the tax.