Tax and Tariff Flashcards
Effects of Tax
A tax places a good wedge between the price that buyers pay and the price that sellers receive.
The quantity of the sold good falls.
Government Benefit from Tax
The government receives = T x Q
The benefit is actually on what the government spends the tax on.
How Tax Affects Welfare
A tax on a good reduces consumer surplus and producer surplus.
Because the fall in producer and consumer surplus exceeds tax revenue, the tax is said to impose a deadweight lost.
Equilibrium without World Trade
When an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand.
World Price
The price of a good that prevails in the world market for that good.
If the world price is higher than the domestic price, than they would become an exporter.
If the world price is lower than the domestic price, than they would become an importer.
International Trade in an Exporting Country
Once trade is allowed the domestic price rises to equal the world price
Domestic producers are better off because now they can sell their good at a higher price.
Domestic consumers are worse off as they now have to purchase the good at a higher price. (Consumer surplus shrinks)
Trade raises the economic wellbeing of a national, for the gains of the winners outweigh the losses of the losers.
International Trade in an Importing Country
When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off and domestic producers are worse off.
What is a tariff and how does it affect imports/exports
A tax on goods produced abroad and sold domestically.
Raises the price of importing a good, above the world price.
Reduces the quantity demanded and raises the quantity suppled.
The tariff reduced the quantity of imports and moves the domestic market closer to its equilibrium without trade.
Benefits of International Trade
Increased variety of goods
Lower costs through economies of sale
Increased competition
Enhanced flow of ideas
Drawbacks of International Trade
Destroys domestic jobs
National security
Unfair competition if all countries are subject to different laws and rules
Why do gov impose taxes?
Governments levy taxes to:
Raise revenue for public projects
Discourage consumption
How do taxes cause a deadweight loss?
Taxes cause deadweight losses because they prevent buyers and sellers from realising some of the gains from trade.
