Micro 3/8

Why government taxes

1. $$$
2. change behavior
3. protect domestic producers

How do we tax

1. Benefit principle: you pay for the programs you benefit from (gas tax used on roads)
2. Ability to pay principle: you should pay if you are able to pay (opposite)(progressive income tax)

Definitions of first graph drawn

• Allocative efficiency: Q is correct from society’s point of view
• Consumer Surplus: amount you are willing to pay minus the actual price of a good
• Producer surplus: actual price the producer gets minus the minimum price they would accept
• Total Surplus: Producer Surplus + Consumer Surplus

2nd graph drawn

• Price equilibrium and Qe are given
• Tax causes supply to shift left, Price to increase, quantity will decrease
• tax revenue: tax * Q after taxes

Taxes and Ed&Es

• Legal incidence: who writes the check? Legal incidence is on producers (in this class)(the result is the same even if the burden is shared)
• Economic incidence (tax burden): who gets screwed?
• General rule: whichever curve is more elastic, that person is going to have less tax burden than the other
• Consumer burden= change in price
• Producer burden= tax – change in price