Intro - Chptr 7/Taxation Flashcards
Consumer surplus?
The value the consumer gets from buying a product less its price, i.e. it is the difference between the price the buyers would have been willing to pay and the price they actually had to pay.
Producer surplus
The price the producer sells a product for, less the cost of producing it, i.e. it is the difference between the price sellers would have been willing to accept and the price they actually received as payment.
Cost of taxation to society includes what 3 things?
(1) direct cost of revenue paid to government; (2) loss of consumer and supplier surplus caused by the tax; and (3) and the cost of administering the tax codes.
What does the “benefit principle of taxation” state?
Individuals who receive the benefit of the good or service should pay the tax necessary to supply that good. e.g. some people pay more gas taxes because they use the road more.
What does the “ability-to-pay principle” state?
Individuals who are most able to bear the burden of the tax should pay the tax.
Deadweight loss and welfare loss triangle
Deadweight loss: The loss of consumer and producer surplus from a tax which is shown graphically by the welfare loss triangle- a graphic representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply/demand equilibrium.
Who bears the burden of a tax?
Who bears the burden of the tax depends upon who is best able to change his behavior in response to tax, or who has the greater elasticity. The more inelastic one’s relative supply & demand, the larger the burden of the tax one will bear. This isn’t necessarily the group that physically pays the tax.
What is another phrase for tax burden relating to who carries the burden?
Tax incidence.
If the government wants to minimize the welfare loss caused by taxation, what types of goods should it tax? (re: elastic/inelastic)
Goods with inelastic supplies or demands. This is what broad-based taxes such as income and sales taxes do.
What is the formula to determine fraction of tax borne by demander?
fraction borne by demander = E(supply) / E(demand) + E(supply)
What is the formula for the fraction of a tax borne by supplier?
fraction borne by supplier = E(demand) / E(demand) + E(supply)
Price ceiling
government-set price below the market equilibrium price; it is a combination implicit tax on suppliers and implicit subsidy to consumers.
Price floors
Government-set prices above equilibrium price; these can be seen as a tax on consumers and subsidy to producers- these transfer consumer surplus to producers.
How do price ceilings differ from taxes?
Price ceilings differ from taxes in that price ceilings create shortages and taxes don’t.
Rent-seeking
An activity designed to transfer surplus from one group to another.
