Econ 202 notes Week 9
Econ 202 notes Week 9 ECON 202
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This 1 page Class Notes was uploaded by Leslie Pike on Tuesday March 29, 2016. The Class Notes belongs to ECON 202 at Western Kentucky University taught by Dean Jordan in Spring 2016. Since its upload, it has received 103 views. For similar materials see PRIN ECONOMICS-MICRO in Economcs at Western Kentucky University.
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Date Created: 03/29/16
Tax incidence is the division of the burden of the tax between the buyer and seller. Tax incidence does NOT depend on tax law. There is a tax on tobacco sellers, but the sellers raised their prices to compensate when the tax was imposed, so the buyers actually ended up “paying” the tax even though the seller had to pay for the actual tax stamp. If the demand for a good is inelastic, buyers will end up bearing most or all of the burden of the tax, regardless of which side the tax was actually imposed on. This is because, for an inelastic good, quantity demanded changes little per change in price, so sellers can raise their price to compensate for the tax and buyers will continue to buy. If the demand for a good is elastic, sellers will end up bearing most or all of the burden of the tax, regardless of which side the tax was actually imposed on. For an elastic good, quantity demanded changes much per change in price, so sellers cannot raise their prices to compensate, and thus they have to pay for the tax. The most efficient (i.e. least wasteful) taxes are taxes on the most inelastic goods. The “sin” taxes, taxes for addictive things (tobacco, alcohol, marijuana in the states where it is legal), generate tons of revenue because of demand inelasticity. Addicts have to have whatever they are addicted to, they will pay any price, so sellers can raise their prices to compensate for the tax and the buyers will still buy. The most inefficient (i.e. most wasteful) taxes are taxes on elastic goods. Sellers cannot raise their prices to compensate for the tax. If the tax is high enough that the companies can no longer make a profit, the companies will go out of business, and the market will be destroyed. Thus, the government gets no revenue because the market is destroyed and nobody benefits. Taxing by the benefit method means that the tax is proportional to the benefit received from whatever that tax payed for. Fuel taxes funding road construction would be a benefit tax, because the people buying the fuel and paying for the tax will be the people who are driving most and thus benefitting from upkeep of roads. Taxing by the Ability to Pay method means that the tax is proportional to the ability to pay (self-explanatory). People with a higher income have a higher income tax and vice versa. A quota is a cap on production, and a subsidy is when government pays for production.