Review of Chapter 6 Macmillan

commodity tax

tax on goods

examples of commodity taxes

alcohol, cigarettes, fuel

What is the first truth about commodity taxation?

who pays the tax doesn't depend on who writes the check to the government

What is the second truth about commodity taxation?

who pays the tax doesn't depend on the relative elasticities of demand and supply

What is the third truth about commodity taxation?

it raises revenue and creates deadweight loss

What is another way to say deadweight loss?

a reduction in the gains from trade

If the government wanted to place a tax on apples, what two ways could they do this?

tax apple sellers $1 for every basket they supply or tax apple buyers for every basket they buy

Who pays a tax is determined by what?

the laws of supply and demand

How do sellers see a tax?

as an increase in prices

What will a $1 tax do to the supply curve?

it will shift it up by 1 at every quantity

A $1 tax will always raise the price by $1: true or false

false

How do you calculate a tax?

price paid by buyers - price received by sellers

What happens when sellers have excess supply?

it creates an incentive to sellers to bring the price down because they want to compete to keep their buyers

As the price falls, what do sellers do?

they supply fewer of the good

What is the wedge shortcut?

driving a tax wedge between the price paid by buyers and the price received by sellers

What determines how the burden of the tax is shared between buyers and sellers?

wedge shortcut

When there is an elastic demand curve...

demanders have a lot of substitutes

What is the relationship between a tax and an elastic demand curve?

can't tax someone with a lot of substitutes because they'll just go and buy the substitute

What happens when supply is more elastic than demand?

suppliers pay less of the tax than buyers

What happens when demand is more elastic than supply?

demanders pay less of the tax than sellers