chapter 6: taxes Flashcards
how do taxes affect buyers?
drives up the prices for consumers, so it makes them reluctant to buying
how do taxes affect sellers?
drives down sales and prices received by the sellers
what does it mean by an equivalence of tax on buyers and sellers?
it doesn’t matter if the government puts the tax on the buyers or the sellers, the end result is exactly the same
what happens to the graph when the tax is imposed on buyers?
the demand curve shifts down
what happens to the graph when the tax is imposed on sellers?
the supply curve shifts up
what is statutory burden?
the burden of being assigned by the government to send a tax payment
what is economic burden?
the burden created by the change in the after-tax prices faced by buyers and sellers
what is tax incidence?
the division of the economic burden between buyers and sellers
what is the tax incidence determined by?
the relative elasticities of the market’s supply and demand curves
if sellers are more inelastic, they hold more of the burden
if buyers are more inelastic, they hold more of the burden
what are the two types of taxes?
1) ad valoren tax
2) specific (unit) tax
what is an ad valoren tax?
- the tax is set as a % of value of the good (ex. sales tax)
- the amount of tax collected depends on value of the good (increases with value of the good)
Pd = Ps (1 + tao)
what is a specific tax?
- the tax is a fixed dollar amount
- value of good does not influence amount of tax collected (carbon tax)
pd = ps + t
how do you calculate government revenue?
G = q * t
what is a subsidy?
a payment made by the government to those who make a specific choice
they increase the quantities demanded and supplied
they lower the price to buyers and increase the price sellers receive
what are the relationships between price consumer pays and price producer receives?
specific: Pd = ps + t
ad valoren: pd = ps (1+ %)
GENERAL: qd = qs
