Topic 4: Taxes and Subsidies

Question 1

formula for tax revenue

Answer 1

T X Q

Question 2

what are the three steps in working out were tax line is drawn

Answer 2

1. Does the tax affect supply or demand curve?
2. Which way does the curve shift (magnitude of shift determined by taxed amount)
3. How does it affect equilibrium (compare)?

Question 3

where does the tax incidence or burden fall

Answer 3

more heavily on side of market that’s less elastic
o As when good is taxed, side of market with fewer alternatives cannot easily leave market and therefore bear more burden of tax

Question 4

is it important to flatten or steepen lines when drawing taxes according to elasticity

Answer 4

yes

Question 5

who gets greater benefit in subsidies

Answer 5

o More inelastic side of market= greater benefit