4. Purposes of Taxes:
-Raise money to purchase the things
that markets usually donāt make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate éę°åé wealth.
(subsidies)
1.) Some Tax Basics
5. What a Tax does in the Market:
- raises the price buyers pay
- lowers the price sellers receive.
- reduces the quantity bought sold.
1.) Some Tax Basics
6. 1.) Some Tax Basics
What a Tax does in the Market:
- raises the price buyers pay
- lowers the price sellers receive.
- reduces the quantity bought sold.
Purposes of Taxes:
-Raise money to purchase the
things that markets usually
donāt make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate éę°åé wealth.
(subsidies)
7. Direct Taxes
-Taxes based on
ownership.
-Paid directly to the
government by people.
-Example:
-Income taxes, property
taxes.
Indirect Taxes
-Taxes paid on a market
transaction.
-Sellers usually pay to
the government.
-Example:
-sales taxes, VAT taxes.
1.) Some Tax Basics - types
8. Direct Taxes
-Taxes based on
ownership.
-Paid directly to the
government by people.
-Example:
-Income taxes, property
taxes.
Indirect Taxes
-Taxes paid on a market
transaction.
-Sellers usually pay to
the government.
-Example:
-sales taxes, VAT taxes.
1.) Some Tax Basics - types
Only look at taxes in
the market right now
9. 2 important types of
Indirect Taxes.
1.) Specific Tax
2.) Ad Valorem Tax
Indirect Taxes
-Taxes paid on a market
transaction.
-Sellers usually pay to
the government.
-Example:
-sales taxes, VAT taxes.
1.) Some Tax Basics - types
More about these
laterā¦
10. Tax effects on the market
1.) Some Tax basics
- Tax increase prices, it doesnāt
change your idea of a product
(Demand)
- but it does change how much you
are willing to buy.
(Quantity Demanded )
So Supply line shifts, Not the Demand line!
11. Tax Incidence
ēØę¶å½å®æ
The division of the burden of a tax between the
buyer and the seller. Who pays more depends
on elasticity.
When a good is taxed, it has two prices:
- A price that includes the tax
- A price that excludes the tax
- Buyers respond to the price with the tax.
- Sellers respond to the price without the tax.
1.) Some Tax Vocabulary
12. Excess Burden
č¶ é¢č“ę
The deadweight loss from a
taxāthe amount by which the
burden of a tax exceeds the tax
revenue received by the
government.
Tax Incidence
1.) Some Tax Vocabulary
14. Two ways to understand taxes on a supply and demand graph
Tax effects on the market
I.) Graph 1 Shows what happens and itās
effect.
II.) Graph 2 Shows the effects and what
happens.
2.) Graphing Taxes
Itās the same graph, just explain in two ways.
15. I. Graph 1 Tax Supply A Tax is a suppliers input cost
so a tax will shift the supply
left the amount of the tax.
2.) Graphing Taxes
16. Changes (shifts) in SUPPLY
(NOT quantity supplied)
1.) Number of Sellers
2.) Price of Resources or Inputs
3.) Prices of Related Goods
i) Substitute in Production
ii) Compliment in Production
4.) Productivity
5.) Expectations
The short answer is:
Everything else that is
NOT due to a change
in price!
5 main reasons:
17. Changes (shifts) in SUPPLY
1.) Number of Sellers
2.) Number of Resources
or Inputs
Example: Ceteris Paribus
If you pay more Taxesā¦
= Less profit
= Less supply
Taxes are just an input cost for
suppliers.
18. PAY MORE TAXES =
An Input cost, so it is
more expensive to
produce the same thing
so you produce less.
Shifts of the Supply Curve
S
2
S
1
Price
Quantity
Decrease in
supply
19. P
Q
D
S
PS
PB
QEQT
S +
tax
2.) Graphing Taxes
- A Tax is a suppliers
input cost so a tax will
shift the supply left the
amount of the tax.
Shift amount of
the tax
20. I. Graph 1 Tax Supply
2.) Graphing Taxes
A.) A Tax is a suppliers input cost so a tax will shift the supply left the
amount of the tax.
B.) Tax increase prices, it doesnāt change your idea of a product (Demand) but it does
change how much you are willing to buy ( Quantity Demanded )
C.) It doesnāt matter if a tax is on the buyer or the seller. The same outcome
will occur on market equilibrium.
Shift Left = Less Supply due to Higher Tax
Prices = Less Quantity Demanded
Prices Market EQ
22. What a Tax does in the Market:
- raises the price buyers pay
- lowers the price sellers receive.
- reduces the quantity bought sold.
1.) Some Tax Basics
This second graph is the same as
the first, it just doesnāt show a shift,
instead shows consumer and
producer surplus, so it is easier to
see why these parts here are true.
24. A.) A Tax puts a wedge between the demand and supply in a market by the
amount of the tax.
B.) The buyers price is the market Equilibrium price
C.) Supplier get less revenue and some leave the market due to lower demand.
Prices = Less Quantity Demanded
= Some suppliers
leave the market
= Market EQ
Price buyers pay ā follow up the demand curve
Price sellers get ā follow down the supply curve
The Taxā the difference ( the size of the wedge)
Less Quantity
Demanded
= Market EQ
II. Graph 2 Tax is a Wedge
26. Next, apply welfare economics to measure the gains and losses
from a tax.
We determine
consumer surplus (CS),
producer surplus (PS),
tax revenue (T),
total surplus (TS)
with the tax
andā¦
without the tax.
3.) Efficacy and Fairness of Taxes
27. P
Q
D
S
Without a tax,
PE
QEQT
A
B C
D E
F
CS = A + B + C
PS = D + E + F
Tax revenue = 0
Total surplus
= CS + PS
= A + B + C
+ D + E + F
3.) Efficacy and Fairness of Taxes
28. P
Q
D
S
PS
PB
QEQT
A
B C
D E
F
CS = A
PS = F
Tax revenue
= B buyer pays
+ D seller pays
Total surplus
= A + B
+ D + F
With the tax,
The tax reduces
total surplus by
C + E
3.) Efficacy and Fairness of Taxes
29. P
Q
D
S
PS
PB
QEQT
A
B C
D E
F
C + E is called the
deadweight loss
(DWL) or excess
burden of the tax,
the fall in total
surplus that
results from a
market distortion
失ē, such as a tax.
3.) Efficacy and Fairness of Taxes
30. 0
50
100
150
200
250
300
350
400
0 25 50 75 100 125
P
Q
A. Compute
CS, PS, and
total surplus
without a tax.
D
S
The market for
airplane tickets3.) another exampleā¦
31. 0
50
100
150
200
250
300
350
400
0 25 50 75 100 125
P
Q
31
D
S
CS
= Ā½ x 200 x 100
= 10,000
Total surplus
= 10,000 + 10,000
= 20,000
PS
= Ā½ x 200 x 100
= 10,000
P =
3.) another exampleā¦
The market for
airplane tickets
32. 0
50
100
150
200
250
300
350
400
0 25 50 75 100 125
P
Q
B. If 100 tax
per ticket,
compute
CS, PS,
tax revenue,
total surplus,
and DWL.
D
S
The market for
airplane tickets
3.) another exampleā¦
33. 0
50
100
150
200
250
300
350
400
0 25 50 75 100 125
P
Q
33
D
S
CS
= Ā½ x 150 x 75
= 5,625
Total surplus
= 18,750
PS = 5,625
Tax revenue
= 100 x 75
= 7,500
DWL = 1,250
PS =
PB =
A 100 tax on
airplane tickets
3.) another exampleā¦
34. P
Q
D
S
PS
PB
QEQT
A
B C
D E
F
CS = A
PS = F
Tax revenue
= B buyer pays
+ D seller pays
Total surplus
= A + B
+ D + F
With the tax,
The tax reduces
total surplus by
C + E
3.) Efficacy and Fairness of Taxes
35. Size of tax = T
QT
P
Q
D
S
EQ with no tax:
Price = PE
Quantity = QE
PS
PB
PE
EQ
EQ with
tax = T per unit:
Sellers receive PS
Quantity = QT
Buyers pay PB
3.) Efficacy and Fairness of Taxes
36. P
Q
D
SRevenue from tax:
T x QT
PS
PB
PE
EQQT
Size of tax = T
The Government Revenue
3.) Efficacy and Fairness of Taxes
37. P
Q
D
SRevenue from tax:
Paid by the buyer
PS
PB
PE
EQQT
Size of tax = T
The Tax Incidence
3.) Efficacy and Fairness of Taxes
38. P
Q
D
S
Revenue from tax:
Paid by the seller
PS
PB
PE
EQQT
Size of tax = T
3.) Efficacy and Fairness of Taxes
The Tax Incidence
39. P
Q
D
S
PS
PB
QEQT
Since of the tax, the
units between
QT and QE are not sold.
The value of these units
to buyers is greater than
the cost of producing
them,
so the tax prevents some
mutually beneficial
trades.
3.) Efficacy and Fairness of Taxes
The Excess Burden
40. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics
3.5) Elasticity of Taxes
41. CASE 1: Supply is more elastic than demand
P
Q
D
S
Tax
Buyersā share
of tax burden
Sellersā share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
Itās easier for
seller than buyers
to leave the
market.
So buyers bear
most of the
burden of the tax.
42. CASE 2: Demand is more elastic than supply
P
Q
D
S
Tax
Buyersā share
of tax burden
Sellersā share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
Itās easier for
buyers than
sellers to leave
the market.
So sellers bear
most of the
burden of the tax.
43. Introduction to Taxes:
3.) Efficacy and Fairness of Taxes
3.5) Elasticity of Taxes
- Taxes placed on the buyers
It doesnāt matter is the tax is placed on the buyer or seller, both are
players in the market, but just to show the elasticity issue, letās say
the taxes are placed primarily on the buyer, the question is, who
actually bears the burden of it?
44. Introduction to Taxes:
3.) Efficacy and Fairness of Taxes
3.5) Elasticity of Taxes
- Taxes placed on the buyers
It doesnāt matter is the tax is placed on the buyer or seller, both are
players in the market, but just to show the elasticity issue, letās say
the taxes are placed primarily on the buyer, the question is, who
actually bears the burden of it?
Different elasticity
means larger or
smaller
deadweight losses
45. P
Q
S
Size
of tax
Buyer pays all and is
Efficient
MC = MB
No deadweight lossD
PS
PB
Taxes, DWL, and the Elasticity of Demand
Perfectly Inelastic Demand
48. P
Q
S
Size
of tax
D
PS
PB
The more elastic is demandā¦
the easier for buyers to leave the
market when the tax increases PB,
Taxes, DWL, and the Elasticity of Demand
Inelastic Demand
49. P
Q
S
Size
of tax
DPS
PB
The more elastic is demandā¦
the easier for buyers to leave the
market when the tax increases PB,
the more Q falls below the
surplus-maximizing quantity,
Taxes, DWL, and the Elasticity of Demand
Inelastic Demand
50. P
Q
S
Size
of tax
D
PS
PB
The more elastic is demandā¦
the easier for buyers to leave the
market when the tax increases PB,
the more Q falls below the
surplus-maximizing quantity,
and the greater the DWL.
Taxes, DWL, and the Elasticity of Demand
Elastic Demand
51. P
Q
Size
of tax
D
The more elastic is demandā¦
the easier for buyers to leave the
market when the tax increases PB,
the more Q falls below the
surplus-maximizing quantity,
and the greater the DWL.PS
PB
S
Taxes, DWL, and the Elasticity of Demand
Elastic Demand
52. P
Q
S
Size
of tax
D
PS
PB
Buyer pays none of the
tax and is not efficient
Large Deadweight Loss
Large Excess Burden
Taxes, DWL, and the Elasticity of Demand
Perfectly Elastic Demand
53. For a given Supply curve, if Demand is:
1.) Perfectly Inelastic Demand: Buyer Pays and Efficient
2.) Inelastic Demand: Buyer pays a higher portion
3.) Perfectly Elastic Demand: Seller Pays and Inefficient
4.) Elastic Demand: Buyer pays a smaller portion
3.5) Elasticity of Taxes
- Taxes placed on the buyers
54. Introduction to Taxes:
3.) Efficacy and Fairness of Taxes
3.5) Elasticity of Taxes
- Taxes placed on the sellers
It doesnāt matter is the tax is placed on the buyer or seller, both are
players in the market, but just to show the elasticity issue, letās say
the taxes are placed primarily on the buyer, the question is, who
actually bears the burden of it?
55. P
Q
D
Size
of tax
S
PS
PB
A tax does not change the
price paid by the
buyer but lowers the
price received by the
seller
MC = MB
Seller pays the entire tax
and is efficient
No deadweight loss
Taxes, DWL, and the Elasticity of Demand
Perfectly Inelastic Supply
58. P
Q
Size
of tax
S
P
S
P
B
D
The more elastic Supply isā¦
itās easier for firms to leave the
market when the tax reduces PS.
Taxes, DWL, and the Elasticity of Demand
Inelastic Supply
59. P
Q
D
Size
of tax
S
P
S
P
B
The more elastic Supply isā¦
itās easier for firms to leave the
market when the tax reduces PS.
Tax begins to reduce Q even
more
Taxes, DWL, and the Elasticity of Demand
Inelastic Supply
60. P
Q
D
Size
of tax
S
P
S
P
B
The more elastic Supply isā¦
itās easier for firms to leave the
market when the tax reduces PS.
Tax begins to reduce Q even
more
and DWL becomes larger
Taxes, DWL, and the Elasticity of Demand
Elastic Supply
61. P
Q
Size
of tax
S
PS
PB
D
The more elastic Supply isā¦
itās easier for firms to leave the
market when the tax reduces PS.
Tax begins to reduce Q even
more
and DWL becomes larger
Taxes, DWL, and the Elasticity of Demand
Elastic Supply
62. P
Q
Size
of tax S
PS
PB
D
The more elastic Supply isā¦
itās easier for firms to leave the
market when the tax reduces PS.
Tax begins to reduce Q even
more
and DWL becomes larger
Taxes, DWL, and the Elasticity of Demand
Elastic Supply
63. P
Q
Size
of tax
S
PS
PB
D
Buyer pays all of the tax
and is not efficient
Large Deadweight Loss
Large Excess Burden
Taxes, DWL, and the Elasticity of Demand
Perfectly Elastic Supply
64. For a given Demand curve, if Supply is:
1.) Perfectly Inelastic Supply: Seller Pays and Efficient
2.) Inelastic Supply: Seller pays a higher portion
3.) Perfectly Elastic Supply: Buyer Pays and Inefficient
4.) Elastic Supply: Seller pays a smaller portion
3.5) Elasticity of Taxes
- Taxes placed on the sellers
65. What should the Government tax?
1.) Which goods or services should government tax
to raise the revenue it needs?
Soā¦
66. Ways to interpret Economic theory
Positive economics
is the study of what is
ē»ęęÆåŗäŗę°ę®
Normative economics
is the study of what should be
ęÆåŗäŗä½ ēęæęęÆä»ä¹ē»ę
67. What should the Government tax?
1.) Which goods or services should government tax
to raise the revenue it needs?
Soā¦
One answer: Those
things with the smallest DWL
68. What should the Government tax?
1.) Which goods or services should government tax
to raise the revenue it needs?
Soā¦
One answer: Those
things with the smallest DWL
2.) When is the DWL small vs. large?
69. What should the Government tax?
1.) Which goods or services should government tax
to raise the revenue it needs?
Soā¦
One answer: Those
things with the smallest DWL
2.) When is the DWL small vs. large?
Turns out it depends on the
price elasticity of supply and
demand.
70. So a recapā¦
3.) Efficacy and Fairness of Taxes
3.5) Elasticity of Taxes
71. CASE 1: Supply is more elastic than demand
P
Q
D
S
Tax
Buyersā share
of tax burden
Sellersā share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
Itās easier for
seller than buyers
to leave the
market.
So buyers bear
most of the
burden of the tax.
72. CASE 2: Demand is more elastic than supply
P
Q
D
S
Tax
Buyersā share
of tax burden
Sellersā share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
Itās easier for
buyers than
sellers to leave
the market.
So sellers bear
most of the
burden of the tax.
73. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics
2.5.) Types of Taxes
74. Direct Taxes
-Taxes based on
ownership.
-Paid directly to the
government by people.
-Example:
-Income taxes, property
taxes.
Indirect Taxes
-Taxes paid on a market
transaction.
-Sellers usually pay to
the government.
-Example:
-sales taxes, VAT taxes.
1.) Some Tax Basics - types
75. 2 important types of
Indirect Taxes.
1.) Specific Tax
2.) Ad Valorem Tax
Indirect Taxes
-Taxes paid on a market
transaction.
-Sellers usually pay to
the government.
-Example:
-sales taxes, VAT taxes.
1.) Some Tax Basics - types
76. Different types of taxes can have different types of outcomes
Specific Tax - Tax on the final good or service in
the market and is a fixed amount.
- Will cause a parallel shift in the
supply curve.
(Unit Tax)
(Excise Tax)
Two types of indirect Taxes.
77. P
Q
D
S
PS
PB
QEQT
S1
- Tax on the final
good or service
in the market.
- Will cause a
parallel shift in the
supply curve.
Specific Tax
Two types of indirect Taxes.
78. P
Q
D
S
PS
PB
QEQT
S1
- Tax on the final
good or service
in the market.
- Will cause a
parallel shift in the
supply curve.
Specific Tax
Two types of indirect Taxes.
Only apply tax at the end of
the production process
when good is in the market
79. Different types of taxes can have different types of outcomes
Specific Tax
Two types of indirect Taxes.
Ad Valorem Tax
(Percentage Tax)
(VAT Tax)
- Tax on any value added
in the production
process.
- Will cause a Pivot å¾ä¾§ in
the supply curve.
80. P
Q
D
S
P
S
P
B
QEQT
S1
- Tax on any
value added in
the production
process.
- Will cause a
Pivot å¾ä¾§ in the
supply curve.
Two types of indirect Taxes.
Ad Valorem Tax
81. P
Q
D
S
P
S
P
B
QEQT
S1
- Tax on any
value added in
the production
process.
- Will cause a
Pivot å¾ä¾§ in the
supply curve.
Two types of indirect Taxes.
Ad Valorem Tax
This is because you tax the
entire production process.
Each step adds āvalueā ā
Tax the value added
83. 1.) Some Tax Basics
What a Tax does in the Market:
- raises the price buyers pay
- lowers the price sellers receive.
- reduces the quantity bought sold.
Purposes of Taxes:
-Raise money to purchase the
things that markets usually
donāt make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate éę°åé wealth.
(subsidies)
84. Tax effects on the market
1.) Some Tax basics
- Tax increase prices, it doesnāt
change your idea of a product
(Demand)
- but it does change how much you
are willing to buy.
(Quantity Demanded )
86. P
Q
D
S
PS
PB
QEQT
A
B C
D E
F
CS = A
PS = F
Tax revenue
= B buyer pays
+ D seller pays
Total surplus
= A + B
+ D + F
With the tax,
The tax reduces
total surplus by
C + E
The Welfare Effects of a Tax
87. CASE 1: Supply is more elastic than demand
P
Q
D
S
Tax
Buyersā share
of tax burden
Sellersā share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
Itās easier for
seller than buyers
to leave the
market.
So buyers bear
most of the
burden of the tax.
88. 2 important types of
Indirect Taxes.
1.) Specific Tax
2.) Ad Valorem Tax
Indirect Taxes
-Taxes paid on a market
transaction.
-Sellers usually pay to
the government.
-Example:
-sales taxes, VAT taxes.
1.) Some Tax Basics - types
89. P
Q
D
S
PS
PB
QEQT
S1
- Tax on the final
good or service
in the market.
- Will cause a
parallel shift in the
supply curve.
Specific Tax
Two types of indirect Taxes.
90. P
Q
D
S
P
S
P
B
QEQT
S1
- Tax on any
value added in
the production
process.
- Will cause a
Pivot å¾ä¾§ in the
supply curve.
Two types of indirect Taxes.
Ad Valorem Tax
91. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics
More of this will be
mentioned in the
second powerpoint on
Taxes