This document provides an introduction to taxes through several sections: 1. Some Tax Basics - Defines direct and indirect taxes, and how taxes impact markets by raising prices and lowering quantities traded. 2. Graphing Taxes - Uses supply and demand graphs to illustrate how a tax shifts the supply curve and creates a "wedge" between what buyers pay and sellers receive. 3. Efficacy and Fairness of Taxes - Applies welfare economics to measure consumer surplus, producer surplus, tax revenue, and deadweight loss with and without a tax. It demonstrates how taxes reduce total surplus.

1. Introduction to Taxes
(part 1)

2. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics

3. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics

4. Purposes of Taxes:
-Raise money to purchase the things
that markets usually don’t make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate 重新分配 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
don’t make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate 重新分配 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
later…

10. Tax effects on the market
1.) Some Tax basics
- Tax increase prices, it doesn’t
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
税收归宿
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
超额负担
The deadweight loss from a
tax—the amount by which the
burden of a tax exceeds the tax
revenue received by the
government.
Tax Incidence
1.) Some Tax Vocabulary

13. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics

14. Two ways to understand taxes on a supply and demand graph
Tax effects on the market
I.) Graph 1 Shows what happens and it’s
effect.
II.) Graph 2 Shows the effects and what
happens.
2.) Graphing Taxes
It’s 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 Taxes…
= 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 doesn’t change your idea of a product (Demand) but it does
change how much you are willing to buy ( Quantity Demanded )
C.) It doesn’t 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

21. Wedge = 楔
II. Graph 2 Tax is a Wedge
2.) Graphing Taxes

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 doesn’t show a shift,
instead shows consumer and
producer surplus, so it is easier to
see why these parts here are true.

23. P
Q
D
S
PS
PB
QEQT
S1
2.) Graphing Taxes
- lowers the price sellers
receive.
- reduces the quantity
bought sold.
Tax amount= Wedge
Price buyers pay
Amount sellers get

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 – follow up the demand curve
Price sellers get – follow down the supply curve
The Tax– the difference ( the size of the wedge)
Less Quantity
Demanded
= Market EQ
II. Graph 2 Tax is a Wedge

25. Introduction to Taxes:
2.) Graphing Taxes
3.) Efficacy and Fairness of Taxes
1.) Some Tax Basics

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
and…
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
失真, 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 example…

31. 0
50
100
150
200
250
300
350
400
0 25 50 75 100 125
P
Q
31
D
S
CS
= ½ x 200 x 100
= 10,000
Total surplus
= 10,000 + 10,000
= 20,000
PS
= ½ x 200 x 100
= 10,000
P =
3.) another example…
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 example…

33. 0
50
100
150
200
250
300
350
400
0 25 50 75 100 125
P
Q
33
D
S
CS
= ½ 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 example…

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
Buyers’ share
of tax burden
Sellers’ share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
It’s 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
Buyers’ share
of tax burden
Sellers’ share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
It’s 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 doesn’t matter is the tax is placed on the buyer or seller, both are
players in the market, but just to show the elasticity issue, let’s 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 doesn’t matter is the tax is placed on the buyer or seller, both are
players in the market, but just to show the elasticity issue, let’s 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

46. P
Q
Size
of tax
D
PS
PB
S
Taxes, DWL, and the Elasticity of Demand
Inelastic Demand

47. P
Q
Size
of tax
D
P
S
P
B
S The more elastic is demand…
Taxes, DWL, and the Elasticity of Demand
Inelastic Demand

48. P
Q
S
Size
of tax
D
PS
PB
The more elastic is demand…
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 demand…
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 demand…
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 demand…
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 doesn’t matter is the tax is placed on the buyer or seller, both are
players in the market, but just to show the elasticity issue, let’s 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

56. P
Q
D
Size
of tax
S
PS
PB
Taxes, DWL, and the Elasticity of Demand
Inelastic Supply

57. P
Q
D
Size
of tax
S
PS
P
B
The more elastic Supply is…
Taxes, DWL, and the Elasticity of Demand
Inelastic Supply

58. P
Q
Size
of tax
S
P
S
P
B
D
The more elastic Supply is…
it’s 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 is…
it’s 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 is…
it’s 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 is…
it’s 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 is…
it’s 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?
So…

66. Ways to interpret Economic theory
Positive economics
is the study of what is
结果是基于数据
Normative economics
is the study of what should be
是基于你的愿望是什么结果

67. What should the Government tax?
1.) Which goods or services should government tax
to raise the revenue it needs?
So…
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?
So…
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?
So…
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 recap…
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
Buyers’ share
of tax burden
Sellers’ share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
It’s 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
Buyers’ share
of tax burden
Sellers’ share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
It’s 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 倾侧 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 倾侧 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 倾侧 in the
supply curve.
Two types of indirect Taxes.
Ad Valorem Tax
This is because you tax the
entire production process.
Each step adds “value” –
Tax the value added

82. So to Summarize so far…

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
don’t make.
-(public goods)
-Restrict certain behaviors.
-(market failure)
-Reallocate 重新分配 wealth.
(subsidies)

84. Tax effects on the market
1.) Some Tax basics
- Tax increase prices, it doesn’t
change your idea of a product
(Demand)
- but it does change how much you
are willing to buy.
(Quantity Demanded )

85. P
Q
D
S
PS
PB
QEQT
S1
2.) Graphing Taxes
- lowers the price sellers
receive.
- reduces the quantity
bought sold.
Tax amount= Wedge
Price buyers pay
Amount sellers get

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
Buyers’ share
of tax burden
Sellers’ share
of tax burden
Price if no tax
PB
PS
3.5) Elasticity of Taxes and Tax Incidence
It’s 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 倾侧 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

92. The End of part 1
Thank you
