Tax incidence

# Tax incidence

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## Tax incidence

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1. Tax incidence

2. What you will learn ... How the tax burden is measured How the tax burden is distributed Take this challenge

3. : ___________burden = ___________ Price S : __________burden P0 = __________ D Quantity Q0 Who bears the tax burden? Suppose the government levies a per-unit tax (t) on a good. Consumers’ (P1-P0) x Q1 S1 t P1 Producers’ (P0-P2) x Q1 P2 Q1

4. 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 Find the quantity transacted and the equilibrium price! Quantity transacted:____ Equilibrium price:____ How much is the tax burden? 70 \$6

5. If a \$2 per-unit tax is levied, what will be the quantity transacted and the equilibrium price? How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100

6. 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100 What is the total tax burden? How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: = tax rate x quantity transacted = ______________ \$2 x 60 = \$120

7. How is the tax incidence shared between consumers and producers? How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100

8. Consumers’ share of the tax burden: How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100 = ____________________ (\$7 - \$6) x 60 = \$60

9. Producers’ share of the tax burden: How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100 = __________________ (\$6 - \$5) x 60 = \$60

10. S1 Price S t P1 P0 P2 D Quantity Q1 Q0 How is the tax burden distributed? Case One: Ed = Es Consumers’ burden _____ Producers’ burden =

11. Price S1 P1 S t P0 P2 D Quantity Q1 Q0 How is the tax burden distributed? Case Two: Ed < Es Consumers’ burden _____ Producers’ burden >

12. Price (\$) S1 t S P1 P0 P2 D Quantity Q1 Q0 How is the tax burden distributed? Case Three: Ed > Es Consumers’ burden _____ Producers’ burden <

13. 50 60 70 80 90 100 90 80 70 60 50 40 50 60 70 80 90 100 Take this challenge The following is the demand and supply schedule for teddy bears: What are the quantity transacted and equilibrium price? Answer: Quantity transacted: _____ units Equilibrium price: _______ 70 \$70

14. 50 60 70 80 90 100 90 80 70 60 50 40 50 60 70 80 90 100 Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 80 90 100 50 60 70 80 90 100 If the government levies a \$20 per-unit tax on teddy bears: How many teddy bears will be sold? Hint: How will the demand and supply schedule change? Answer: ______ units 60

15. Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 70 80 90 100 50 60 70 80 90 100 If the government levies a \$20 per-unit tax on teddy bears: What is the total tax burden? Answer: __________________ \$20 x 60 = \$1,200

16. Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 70 80 90 100 50 60 70 80 90 100 If the government levies a \$20 per-unit tax on teddy bears: How much is the consumers’ tax burden? Answer: ________________________________ = (\$80 - \$70) x 60 = \$600

17. Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 70 80 90 100 50 60 70 80 90 100 If the government levies a \$20 per-unit tax on teddy bears: How much is the producers’ net revenue? Answer: ____________________________________ ____________________________________ = revenue after tax - total tax burden = \$80 x 60 - \$1,200 = \$3,600