Transcript Who is economically hurt when the following person is taxed…

TAXES!
Why do I tax
all the time?
How Taxes Affect Market Outcomes
• Market not efficient
– Total surplus not maximized
• When a good is taxed, the
quantity sold is smaller.
• Buyers and sellers share
the tax burden.
Tax incidence
• When the burden of a tax is shared among
participants in a market
If there is a sales tax on buying these candy
worms, it’s not just the kid with worms
who feels the burden of the tax
CANDY WORM MARKET
Price
$1
$2
$3
$4
$5
Qd
50
40
30
20
10
Qs
10
20
30
40
50
Let’s say there is a $0.50 tax on buying
candy worms
3 questions must be answered to figure out the tax incidence
Question 1: Does the tax affect the supply curve or the demand curve?
Question 2: Which way does the curve shift?
Question 3: How does the shift affect equilibrium?
What happens if there is a $0.50 tax
on the buyer?
P
S1
D1
Q
Your turn
Assume the government wants to reduce the amount of
sugar Americans are consuming. So, they enforce a
excise tax of $1.00 for every candy worm produced.
3 questions must be answered to figure out the tax incidence
Question 1: Does the tax affect the supply curve or the demand curve?
Question 2: Which way does the curve shift?
Question 3: How does the shift affect equilibrium?
What happens if there is a $0.50 tax
on the seller?
P
S1
D1
Q
Elasticity and Tax Incidence
• In what proportions is the burden of the tax
divided?
• How do the effects of taxes on sellers compare
to those levied on buyers?
• The answers to these questions depend on
the elasticity of demand and the elasticity of
supply.
How the Burden of a Tax Is Divided
(a) Elastic Supply, Inelastic Demand
Price
1. When supply is more elastic
than demand . . .
Price buyers pay
Supply
Tax
2. . . . the
incidence of the
tax falls more
heavily on
consumers . . .
Price without tax
Price sellers
receive
3. . . . than
on producers.
0
Demand
Quantity
How the Burden of a Tax Is Divided
(b) Inelastic Supply, Elastic Demand
Price
1. When demand is more elastic
than supply . . .
Price buyers pay
Supply
Price without tax
3. . . . than on
consumers.
Tax
2. . . . the
incidence of
the tax falls
more heavily
on producers . . .
Price sellers
receive
0
Demand
Quantity
Your turn…again
Luxury Tax
Luxury Tax
• In 1990, Congress adopted a new luxury tax
on items that only the rich could afford. The
goal of this tax is to raise revenue from those
who could easily afford to pay
• Answer this question: Does the price
incidence truly affect buyers more?
• Write a short answer and provide a supply and
demand curve to further explain your answer.