ECON-101 Chapter Notes - Chapter 8-14: Pigovian Tax, Tax Rate, Root Mean Square

73 views6 pages

turquoisewalrus441

18 Dec 2016

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

C+e = deadweight loss (dwl) of the tax, due to tax, units between qt and qe are not sold. Value of these units to buyers is greater than cost of producing them, so tax prevents some mutually bene cial trades. Size of dwl; price elasticities of supply and demand. When supply is inelastic its harder for rms to leave the market so tax only reduces q and dwl is small. When supply is more elastic, its easier for rms to leave market when tax reduces ps. The greater q falls below the surplus maximizing quantity, the greater the dwl. When demand is inelastic, its harder for consumers to leave the market when tax raises pb, so tax only reduces q and dwl is small. When demand is elastic its easier for consumers to leave the market when the tax increases. Pb, the more q falls below the surplus, maximizing quantity, and the greater the dwl.

Related Questions

Excise Taxes and Tax Revenue: The government pays attention to elasticity of demand when it selects goods and services on which to levy excise taxes (taxes levied on the production of a product or on the quantity fo the produc purchased). If a $1 tax is levied n a product and 10,000 units are sold, tax revenue will be $10,000 $1 X 10,000 units sold). If the government raises the tax to $1.50, but the higher prices that results reduces sales (quantity demanded) to 4000 because demand is elastic, tax revenue will decline to $6000 $1.50 X 4000 units sold). So a higher tax on a product that has an elastic demand will b ring in less tax revenue. In contrast, if demand is inelastic, the tax increase from $1 to $1.50 will boost tax revenue. For example, if sales fall from 10,000 to 9000, tax revenue will rise from $10,000 to $13,500 $1.50 X 9000 units). Little wonder that legislatures tend to seek out products such as liquor, gasoline, cigarettes, and phone services when levyingand raising taxes. Those taxes yield high tax revenues.

Question: Under what circumstance might a reduction of an excise tax actually produce more tax revenue?

jadesardine228

Name a good with a negative externality associated with it, and explain the externality.

ii) Does this good have an elastic or inelastic demand? What about its supply? Explain.

iii) What two goals can be accomplished by taxing this good? How does the elasticity of the

good help to determine the effectiveness of the tax for accomplishing these goals?

iv) Which side of the market will be hurt more by a tax, the producers or the consumers? Why?

(If you think they will be hurt equally, say so and justify).

v) What is another policy option for achieving at least one of the goals listed in (iii)? Discuss its

pros and cons when compared to taxation.

beigesalmon212

1. Suppose the supply curve with no quota is

Q No Quota=-10 + 0.5p

and the market supply with a quota is

Q Quota=0.5 + 0.25p.

Output (Q) is in thousands of units.

Assuming an inverse demand curve of p = 80-2Q, what will be the effect of a binding quota on equilibrium price and quantity?

A. Price rises by $2.67 and output falls by 1.33 thousand.

B. Price falls by $5 and output falls by 2 thousand.

C. Price falls by $1.33 and output rises by 2.67 thousand.

D. Price rises by $5 and output falls by 2 thousand.

E. Price falls by $3 and output rises by 1.25 thousand.

F. Price rises by $5 and output rises by 2 thousand.

Which of the following is true?

A. The elasticity of supply varies only along the upward-sloping linear supply curves.

B. The elasticity of supply varies along most supply curves.

C. The elasticity of supply is constant along most supply curves.

D. None of the above.

A. When I> 1, supply is considered elastic.

B. When 0<I< 1, supply is considered inelastic.

C. When I = 1, supply is considered unit elastic.

D. All of the above.

E. None of the above.

yellowox78

ECON-101 Chapter Notes - Chapter 8-14: Pigovian Tax, Tax Rate, Root Mean Square

Document Summary

Get access

Related Documents

ECON-101 Lecture Notes - Lecture 8: Deadweight Loss, Market Distortion, Economic Surplus

ECON-101 Chapter Notes - Chapter 1-18: Economic Equilibrium, Demand Curve, Economic Surplus

ECON-101 Lecture Notes - Lecture 5: Midpoint Method, West Bank Areas In The Oslo Ii Accord, Time Horizon

Related Questions