12/4/25 Class Notes + Production Possibilities Curve

Excise (sales) taxes:

• When the tax is imposed on a seller, that (from the persepctive of the seller) is just another cost

• Incidence of Tax = whom does it fall

• In this case, the incidence is shared by both the buyer and the seller

We get the same outcome if the

government put the burden of the tax on the buyer instead of the seller

What determines how the burden is shared is the relative elasticity of supply and demand

• greater elasticity of demand relative to supply, the greater the burden is on the seller

• greater elasticity of supply relative to demand, the greater the burden is on the buyer

Dead weight loss =

the quantities that were sold before the tax that are not sold as the result of the tax

All taxes have a dead weight loss.

We can’t conclude from this fact that whether or not the tax is unjust

How the government spends the tax money determines if the tax is unjust or not

• Spending doesn’t produce value to society → unjust tax

• Spending produces value to society → just tax

Production Possibilities Curve

• Scarcity: Limited resources restrict output.

• Trade-offs: Choosing more of one good means less of another.

• Opportunity Cost: The value of the next best alternative forgone.

• Efficiency vs. Inefficiency: Points on the curve = efficient; inside = underutilization; outside = unattainable with current resources