Microeconomics: Taxes

Flashcards about Microeconomics: Taxes

What is the primary role of the government in a competitive market, beyond being a buyer or seller?

To ensure the well-functioning of the market through enforcement of property rights, regulation of economic relationships, and provision of utilities and public works.

How do sales taxes affect supply and demand?

Sales taxes can shift the supply or demand curve depending on whether they are levied on sellers or buyers, affecting the equilibrium price and quantity.

What is a per-unit tax (or specific tax)?

A fixed amount of money for each unit of a good or service.

How does a specific tax imposed on buyers affect their willingness to buy?

It reduces the willingness to buy, shifting the demand curve to the left.

If the government imposes a tax of €2 per kilo and the original price was €4, what do consumers need to pay per kilo?

Consumers need to pay €6 per kilo (original price + tax).

What is tax incidence?

The division of the burden of a tax between buyers and sellers which depends on the sensitivity of demand and supply to changes in the price.

What happens when the price elasticity of demand is relatively low compared to the price elasticity of supply?

The burden of a specific tax falls mainly on consumers.

What happens when the price elasticity of demand is relatively high compared to the price elasticity of supply?

The burden of a specific tax falls mainly on producers.

What has to be true for the tax to reduce the consumption of junk food?

Demand should be elastic and supply inelastic.

What is consumer surplus after tax?

The area below the original demand curve and the price consumers pay after the tax.

What is producer surplus?

The area above the supply curve but below the price received by the farmers.

How to calculate the fiscal revenue to the government?

Tax times quantity sold (𝜏 × 𝑄).

What is the deadweight loss from a specific tax?

It results from beneficial unexploited transactions.

What are the two countervailing effects when increasing the tax rate?

1. Higher tax rate means more revenue for each unit sold., and 2. Higher tax rate reduces the quantity of sales.

What goods should be taxed to minimize deadweight loss?

Goods with the lowest price elasticities.

What is total inefficiency of tax?

Deadweight loss + Administrative costs

What is the effect on the willingness to sell of producers, if a specific tax is levied on sellers?

The tax reduces the willingness to sell of producers.

What is neutrality of sales tax?

The equilibrium and the incidence of the tax are the same regardless of whether the government collects the tax from consumers or producers.