Chapter 6: taxes and subsidies

commodity taxes

taxes on all goods

truths about commodity taxes

Who ultimately pays the tax does not depend on who writes the check to the government

Who pays the tax does depend on the relative elasticities of supply and demand

... taxation raises revenue and creates deadweight loss (reduces the gains from trade)

who pays the tax

When demand is more elastic than supply, demanders pay less of the tax than the sellers. When supply is more elastic than the demand suppliers pay less than buyers

Creation of deadweight loss

The tax decreases consumer and producer surplus. Some of the consumer and producer surplus is transferred to the government in the form of tax revenues, the consumer and producer surplus decrease by more than the government revenue increases, this comes from ...

deadweight loss

The reduction in total surplus caused by the market distortion or inefficiency

subsidies

A .. is a reverse tax

Instead of taking money away from the consumers (or producers) the government gives money

truths about subsidies

who gets the ... is not dependent on who gets the check from the government

Who benefits from a ... does depend on the relative elasticities of demand and supply

... must be paid for by taxpayers and they create inefficient increases in trade (deadweight loss)

wage subsidies

... can be costly. The cost of the subsidy amount times the number of workers who are hired under the program. ... , however, could have an offsetting benefit to taxpayers, making their total cost less than it first appears