01:220:102 Chapter Notes - Chapter 7: Payroll Tax, Regressive Tax, Sales Tax

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skyoyster85

5 Mar 2019

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01:220:102 Full Course Notes

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Taxes drive a wedge between the price buyers pay and the price sellers receive. Incidence of tax - measures of who really pays it. When the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls mainly on consumers. When the price elasticity of demand is high and the price elasticity of supply is low, the burden of an excise tax falls mainly on producers. The area of the rectangle that forms between the amount of quantity supplied and the excise tax is the total tax revenue. A tax generates revenue and creates a deadweight loss. Deadweight loss is larger when demand is elastic. Deadweight loss is smaller when demand is inelastic. If the goal in a tax policy is efficiency (minimizing deadweight loss), then policymakers should choose the goods with the lowest price elasticities.

Related Questions

7. Effect of a tax on buyers and sellers

The following graph shows the daily market for wine. Suppose the government institutes a tax of $23.20 per bottle. This places a wedge between the price buyers pay and the price sellers receive.

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

Quantity(bottles of wine) Price buyers pay(Dollars per bottle) Price sellers receive(Dollars per bottle)

Before tax

After tax

Using the data entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. enter your results in the following table.

Tax burden(Dollars per bottle) Elasticity

Buyers

Sellers

The burden of the tax falls more heavily on the ..........elastic side of the market.

champagnehippopotamus285

Label each of the following statements about the economics of taxes as true or false.

A) The incidence of a tax is determined by which group (buyers or sellers)
must actually pay the government.

B) When demand is inelastic and supply is elastic, the burden of a tax falls
mainly on producers.

C) When demand is elastic and supply is inelastic, the burden of a tax falls
mainly on consumers.

D) An excise tax can distort incentives and create missed opportunities for
mutually beneficial transactions.

champagnefly512

Suppose you are hired by the Martin guitar company as an economic consultant. You estimate the demand for Martin guitars to be Q = 8000 - 2P. Suppose the supply of Martin Guitars is given by Q = -2000 +3P. What is the equilibrium price of Martin guitars?

What is the equilibrium quantity of Martin guitars?
What is the price elasticity of demand at the equilibrium price and quantity?
What is the price elasticity of supply at the equilibrium price and quantity?
For the next seven questions, suppose a per-unit excise tax of $40 per guitar is levied on the consumers.

What price will sellers receive after the tax is levied?
What price will consumers pay after the tax is levied?
What percent of the tax will be paid by the consumers of Martin guitars? (give an answer between 0 and 100)
What percent of the tax will be paid by the suppliers of Martin guitars? (give an answer between 0 and 100)
How many guitars will be sold after the tax is imposed?
How much consumer surplus do consumers get after the tax?
What is the deadweight loss created by this tax?

beigebadger867

01:220:102 Chapter Notes - Chapter 7: Payroll Tax, Regressive Tax, Sales Tax

01:220:102 Full Course Notes

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