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Welfare Effects of Taxes and Subsidies

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Unit 1 Micro Revision

Unit 1 Micro Revision

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  • 1. Unit 1 MicroWelfare Effects ofIndirect Taxes andSubsidies
  • 2. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post tax
  • 3. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives C
  • 4. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenue
  • 5. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenue
  • 6. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenueConsumerburden
  • 7. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenueConsumerburden
  • 8. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenueConsumerburdenProducer burden
  • 9. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? _________If elasticity of demand fora product is (-) 0.4 thenthe majority of theburden of a tax on theproducer will be paid bythe _________________In the event of a new taxon a product, the pricewill rise by the fullamount of the tax whenthe price elasticity ofdemand is ___________
  • 10. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? _________
  • 11. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? Infinity
  • 12. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? InfinityIf elasticity of demand fora product is (-) 0.4 thenthe majority of theburden of a tax on theproducer will be paid bythe
  • 13. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? InfinityIf elasticity of demand fora product is (-) 0.4 thenthe majority of theburden of a tax on theproducer will be paid bythe Consumer
  • 14. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? InfinityIf elasticity of demand fora product is (-) 0.4 thenthe majority of theburden of a tax on theproducer will be paid bythe ConsumerIn the event of a new taxon a product, the pricewill rise by the fullamount of the tax whenthe price elasticity ofdemand is ___________
  • 15. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? InfinityIf elasticity of demand fora product is (-) 0.4 thenthe majority of theburden of a tax on theproducer will be paid bythe ConsumerIn the event of a new taxon a product, the pricewill rise by the fullamount of the tax whenthe price elasticity ofdemand is ZERO
  • 16. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidy
  • 17. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidyCD
  • 18. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidyCDESupplierreceives CConsumerpays B
  • 19. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidyCDESupplierreceives CConsumerpays BSubsidypayment
  • 20. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidy
  • 21. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCD
  • 22. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCDE
  • 23. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCDE
  • 24. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCDEElastic demand – so asubsidy causes a large risein quantity demanded