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BROWN U / Economics / ECON 0110 / What is flat tax?

# What is flat tax? Description

##### Description: These notes cover chapter 6, 7, and 8.
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9-17-13

## What is flat tax?

Chapter 6: Supply, Demand, and Government Policies

Taxes

- If you have a price that is not P*, you will end up with either a surplus or a shortage. - Price ceilings lead to shortage

- Price floors lead to surpluses

Taxes

Government collect taxes.

Government spends that money on: schools, military, etc.

Flat tax:​ fixed tax on a transaction

% Tax:​ a percentage of the total amount (ex: income, sales tax)

Ice Cream Market

## What is elasticity and tax incidence?

At the new equilibrium:

● Quantity falls 100 -> 90

● Price received by seller falls \$3 -> \$2.80

● Net price (including tax) paid by buyers rises \$3 -> \$2.80 + \$0.50 = \$3.30 Both sellers and buyers are worse off!

Lesson: Buyers and Sellers share the burden of taxes

A Tax on Sellers

Now sellers “see” a different price: P-tax

So the Supply Curve shifts up by the amount of the tax

If you want to learn more check out What is the Great Man Theories?

If you want to learn more check out What is a archaeology?

At the new equilibrium:

● Quantity falls 100 -> 90

● Net Price (minus tax) received by Sellers falls \$3.00 -> \$3.30-\$0.50=\$2.80 ● Price paid by Buyers rises \$3 -> \$3.30 If you want to learn more check out What is chiral?

Again, both sellers and buyers are worse off!

Lesson: It doesn’t matter which side of the market the government taxes! Buyers and Sellers always share the burden.

Elasticity and Tax Incidence

● The burden of a tax falls more heavily on the LESS ELASTIC side of the market.

Example: Perfectly inelastic supply. Suppliers will bear most of the burden of the tax.

9-19-2018

Chapter 7: Consumers, Producers, and the Efficiency of Markets

Positive: What is VS Normative: What could be

Market forces of supply and demand lead to equilibrium price and quantity. Welfare Economics:​ the study of how the allocation of resources affects well-being

Consumer Surplus

● Willingness to pay (WTP)

● The maximum amount that a buyer is willing to pay for a good

○ Ex: bidding for an elvis album

○ Price < WTP = yes! Buy it!

○ Price > WTP = No. Forget it. Keep my \$.

○ Price = WTP -> “Indifferent” (equally happy)

■ Between buying and keeping my money

Willingness to pay

Taylor

\$100

Carrie

\$80

Rihanna

\$70

\$50

● Consumer surplus = buyers WTP - Actual Price

Price

Quantity Demand

\$80.01 to \$100

Taylor

1

\$70.01 to \$80

Taylor, Carrie

2

\$50.01 to \$70 Don't forget about the age old question of Many relied on continental congress, governors and state legislatures for financial support and for information.

Taylor, Carrie, Rihanna

3

\$50 and belo

4

Above \$100

none

0

There is a close relationship between WTP and DEMAND

Demand Curve measures WTP.

Demand Curve

● BEFORE: “for every P, this is Q”

○ At every price, this is the quantity demanded in the market

● NOW: “for every Q, this is the P”

○ At any quantity, the price is willingness to pay of the marginal buyer ■ The buyer who would leave the market first if the price was any higher ● Consumer surplus

○ Given a price, is the area UNDER the demand curve ABOVE that price

Now suppose we have our usual linear demand curve…

How price affects consumer surplus

What exactly is consumer surplus measuring? If you want to learn more check out what is Technology ​​and​​ Art?
We also discuss several other topics like What crop expanded in the Everglades due to 1960’s and 1970’s geo-politics?

Generally consumer surplus will reflect the economic well-being that WE (society) want to maximize.

Producer Surplus

● “Willingness to sell”

○ The value of everything a seller must give up to produce a good OR lowest price willing to sell for OR opportunity cost

○ If price < cost -> NO. Forget it, do other job.

○ If price > cost -> YES! Hir me now !

○ If price = cost -> Indifferent, equally happy with either

● Ex: bidding for painting your house:

○ Andy wins the bid with \$600 (or 599.99) and gets the job

○ But Andy was willing to paint for \$500, so he “gains” by \$100

● Producer Surplus = Amount received by Sellers - Cost to Sellers

Seller

Cost

Vincent

\$900

Claude

\$800

Pablo

\$600

Andy

\$500

Price

Seller

Quantity Supplied

More than \$900

Andy, Claude, Pablo, Vincent

4

\$800 - \$900

Andy, Pablo, Claude

3

\$600 - \$800

Andy, Pablo

2

\$500 - \$600

Andy

1

Less than \$500

none

0

Supply Curve

● BEFORE: “for every P, this is the Q”

○ At every price, this is the quantity supplied in the market

● NOW: “for every Q, this is the P”

○ At any quantity, the price is the cost of the marginal seller

■ The seller who would leave the market first if the price were any lower ● Consumer Surplus

○ Given a price, it is the area ABOVE the supply curve BELOW that price

Now suppose we have our usual linear supply curve…

How price affects producer surplus

Efficiency

● When a resource allocation maximizes the total surplus received by all members of society

● An allocation is NOT efficient if there are some gains from trade that are not realized

Consumer and Producer Surplus in Market Equilibrium

We Can See That

1. Free markets allocate goods to the buyers who value them most highly. 2. Free markets allocate sales of goods to the sellers who can produce at lowest cost.

Punchline

The equilibrium (of supply and demand) in a market maximizes the total benefits received by buyers and sellers.

It cannot be improved upon by the social planner unless… -> market failure. “Laissez Faire”- allow them to do

9-21-2018

Chapter 8: The Costs of Taxation

How Taxes Affect

1) Equilibrium Price

a) Generally worse for both sellers and buyers

2) Equilibrium Quantity

a) Generally falls

3) Incidence on Buyers and Sellers

a) Generally shared by both, depending on elasticities

The Effects of a Tax

How Do Taxes Affect Welfare?

We need to compare:

● The cost to buyers and sellers

VS

● The benefit to the government

Size of Tax​ = T

Tax Revenue​ = T x Q

How Taxes Affect Welfare

1. Change in Consumer Surplus

a. Before Taxes: A + B + C

b. After Taxes: A

2. Change in Producer Surplus

a. Before Taxes: D + E + F

b. After Taxes: F

3. Government Revenue

a. Before Taxes: Nothing

b. After Taxes: B + D

a. After Taxes: C + E

b. Nobody got this

Deadweight Loss:​ the fall in total surplus that results from distorting the market outcome - The Welfare losses to buyers (loss of CS) and sellers (loss of PS) caused by taxation exceed the revenue raised by the government.

- “Leaky Bucket” : lose some of it but gain some equity

● Taxes are distorting incentives.

● They cause markets to allocate resources inefficiently.

● Consumers consume less.

● Sellers produce less.

● The market shrinks below its optimum.

● Total surplus is less than it could be.

1. The greater the elasticity (responsiveness) of supply and demand.

a. When taxes are imposed, prices go up, and everyone leaves the market. 2. The larger the tax.

More elasticity means more deadweight loss

- The more elastic participants are, the more it will distort things.

Higher Taxes Means More Deadweight Loss

The Laffer Curve

“Supply-Side Economics” asserts that cutting tax rates increases the incentive to work and therefore increases tax revenue.

...Or else budget deficits!

How Big Should the Government Be?

● Mankiw page 163:

○ “Provide more services or reduce the tax burden”

● Friedberg:

○ “Provide adequate services or give (rich) people tax cuts”

NOTE:

1. The government is the people!

a. Revenue benefits society

b. Some government services are good, even vital

c. Focus should be on how to tax and spend as efficiently (and equitably) as possible, not how to eliminate taxation.

2. Should compare the welfare loss VS gain.

a. This is different from the dollar loss VS gain, because the marginal dollar is valued more by poor people than rich people.