Market Intervention: Taxes
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Market Intervention: Taxes
Mr. BarnettUniversity HighAP Economics
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Taxes Why does the government
tax goods & services like cigarettes, alcohol and gambling? “Sin taxes” ▪ Health drawbacks from alcohol
and cigarettes are paid for by all members of society (users and non-users)
▪ Thus, seems fair to tax individuals using products
Addictive – so demand is inelastic and a tax would raise a lot of money
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Taxes
Tax incidence – the manner in which the burden of a tax is shared among participants in a market
How taxes affect market outcomes Unit taxes (Government requires buyers or
sellers to pay a certain dollar amount for each unit of a good sold)▪ Will ______ supply, Will ______demand▪ The supply/demand curve will decrease (shift
left) by the amount of the tax
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Taxes How taxes affect market outcomes cont.
The quantity of the good sold will decline Buyers and sellers share the burden of the tax▪ Do buyers and sellers like taxes? Why not?
▪ Buyers pay more for the good (b/c of added tax)▪ Sellers receive less for the good
Taxes discourage market activity Tax can be on buyers or sellers (thus, can affect supply
or demand curve) ▪ Supply curve shifted by taxes on suppliers▪ Demand curve shifted by taxes on consumers
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Tax!, Tax!, Tax!, Tax!, Tax!, Tax! Partner 1: You are “Big Brother”
Choose a good you want, who you are taxing & why you are taxing that good
Tell your partner what the original price was and the amount of the tax
Partner 2: You are the supplier or consumer Show the shift in the supply or demand curve Show Prices▪ Price without tax▪ Price that buyers will now pay▪ Price that sellers will now receive
Partner 1: Show the resulting graph and prices if you switch who (buyer or supplier) got taxed
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Tax
When a tax is imposed on good with inelastic demand (like cigarettes) producers are able to pass along most of it to consumers
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Tax
If the supply is more inelastic than demand, then the producer will bear a greater burden of the tax
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Vroom…Vroom! What is the tax burden on consumers and producers if the government
passed an excise tax on new fuel-inefficient cars that did not get 35 miles per gallon?
A new Aston Martin DB9 costs around $200,000 Averages 13 MPG
The elasticity of demand for a new Aston Martin DB9 is 4.0 and the elasticity of supply is 0.5
Aston Martin Lagonda Limited is taxed by the government $3,000 per unit (car).
Will consumers or producers bear more of the burden from the tax? The shift in the _______curve to the _____is equal to $_______ The consumers’ share of the tax burden is $_____ Producers share of the tax burden is $______ The new price consumers pay is $_______ The new price suppliers receive is $_________ Graph it!
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Let’s Graph it!
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Taxes Three criteria for all taxes
Is it equitable/fair▪ Taxes should be impartial and fair▪ Need to avoid possible loopholes that create inequality
Is it objective?▪ Need to avoid possible loopholes that create inequality▪ Is it easy to understand?▪ Individual income tax – difficult to understand and do on your own▪ Sales tax – easier to understand and straightforward
Is it efficient? ▪ Easy to administer ▪ Reasonably successful at generating revenue – worthwhile
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Economic Impact of Taxes
Resource Allocation: factors of production affected when taxes are levied May raise costs of production, product price
Behavior Adjustment: some taxes encourage/discourage behavior Ex: Sin Tax = relatively high tax designed to raise
revenue, discourage consumption of socially undesirable product
Ex: Homeowners use interest paid on mortgage as tax deduction … encourages people to buy a home
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Economic Impact of Taxes
Productivity & Growth - Taxes can
change incentives to save, invest, and work
Why work more if you’ll be taxed more?
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Economic Impact of Taxes Incidence of Tax, or final burden of
the tax = who actually “pays” it? Ex: City wants to tax local utility co…
utility co. raises rates = consumer bears burden of the tax
Is the tax fair/equitable?
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Payroll Tax
1. FICA (Social Security) taxes2. How elastic are these curves?3. Designed so workers and firms share burden of the tax4. How does the tax affect labor suppliers & labor demanders
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Elasticity & Tax Incidence Let’s recap
A tax burden falls more heavily on the side of the market (suppliers or consumers) that is _______ elastic
A small elasticity of demand means that buyers do not have good alternatives ▪ No good substitute (opportunity cost)
A small elasticity of supply means that sellers do not have a good alternative to produce▪ No good plan B (opportunity cost)
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Back to smoking ….
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Back to smoking ….
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Back to smoking ….
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Back to smoking ….
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Quiz Prep Go through your notes for this week and
come up with 2 quiz questions
Write down your quiz questions on scrap paper
Exchange questions with a partner and answer each other’s questions
Discuss answers!
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Closure
An ideal tax has what characteristics? Do consumers or producers benefit
from a government tax?