Welfare Effects of Taxes and Subsidies

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Unit 1 Micro Revision

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Welfare Effects of Taxes and Subsidies

  1. 1. Unit 1 MicroWelfare Effects ofIndirect Taxes andSubsidies
  2. 2. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post tax
  3. 3. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives C
  4. 4. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenue
  5. 5. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenue
  6. 6. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenueConsumerburden
  7. 7. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenueConsumerburden
  8. 8. Welfare Effects of a Tax and a SubsidyCosts andBenefitsOutputDemandSupply pre taxABSupply post taxBCConsumerpays BSupplierreceives CTax revenueConsumerburdenProducer burden
  9. 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. 10. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? _________
  11. 11. Quick Test!An indirect tax on theproduction of a good willhave no effect on price ifthe price elasticity ofdemand is? Infinity
  12. 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. 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. 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. 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. 16. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidy
  17. 17. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidyCD
  18. 18. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidyCDESupplierreceives CConsumerpays B
  19. 19. Welfare effects of a subsidyCosts andBenefitsOutputDemandSupply post subsidyABSupply pre subsidyCDESupplierreceives CConsumerpays BSubsidypayment
  20. 20. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidy
  21. 21. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCD
  22. 22. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCDE
  23. 23. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCDE
  24. 24. A subsidy when demand is price elasticPriceOutputDemandSupply post subsidyABSupply pre subsidyCDEElastic demand – so asubsidy causes a large risein quantity demanded

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