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

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