Commodity Taxation and Subsidies

Vocabulary flashcards covering tax incidence, wedges, deadweight loss, elasticity effects, and subsidy parallels.

Commodity Taxation

A government-levied charge on each unit of a good sold, which raises revenue and creates deadweight loss by reducing gains from trade.

Tax Wedge

The gap between the price buyers pay and the price sellers receive created by a tax; equal to the per-unit tax.

Tax Incidence

The division of a tax’s burden between buyers and sellers, determined by the relative elasticities of demand and supply.

Deadweight Loss (Taxation)

The reduction in total surplus that occurs because a tax discourages mutually beneficial trades.

Elasticity and Tax Burden

The side of the market (buyers or sellers) that is more elastic bears less of the tax burden.

Tax on Producers

A per-unit charge collected from sellers, shifting the supply curve upward by the amount of the tax.

Tax on Consumers

A per-unit charge collected from buyers, shifting the demand curve downward by the amount of the tax.

Government Tax Revenue

The rectangular area equal to (tax per unit) × (quantity traded after the tax).

Elastic Demand

A demand curve with high responsiveness to price; leads to a larger deadweight loss from a given tax.

Inelastic Demand

A demand curve with low responsiveness to price; leads to a smaller deadweight loss from a given tax.

Subsidy

A reverse tax in which the government pays consumers or producers for each unit traded, raising the price sellers receive and lowering the price buyers pay.

Subsidy Wedge

The difference between the price received by sellers and the price paid by buyers created by a subsidy; equal to the per-unit subsidy.

Deadweight Loss (Subsidy)

The inefficiency arising because subsidies encourage trades where cost exceeds value, leading to wasteful overproduction.

Elasticity and Subsidy Benefit

The more inelastic side of the market captures a larger share of the subsidy’s monetary benefit.

Overproduction

Production beyond the equilibrium quantity, often spurred by subsidies, where cost exceeds value, creating waste.

Gains from Trade

The total surplus enjoyed by buyers and sellers; reduced by taxes and distorted by subsidies.

Mortgage Subsidy Example

A policy in which subsidized loans raise housing demand, bid up home prices, attract excess resources to construction, and create deadweight loss.