Studied by 0 people
Chapters 6, 7, 8, 9, and 11
Commodity Taxes
Taxes on “everyday” goods like fuel, cigarettes, and liquor.
Who pays commodity taxes to the government? (sellers/buyers)
The sellers or the buyers pay commodity taxes, and it doesn’t matter who the government takes the taxes from. It has the same effect.
Tax Wedge
The “$1 tax” is the wedge (on a graph) between the price paid by buyers and the price paid by sellers.
Who pays more or less tax depending on the elasticity of the demand or supply curve?
the more elastic side of the market (demand/supply curve) can escape more of the tax.
demand curve more elastic = demanders (buyers) pay less than sellers
supply curve more elastic = suppliers (sellers) pay less than buyers.
Health Insurance Mandate
An act that required large employers to pay for employees’ health insurance.
Health Insurance Mandate Act name
2010 Patient Protection and Affordable Care Act (“Obamacare”)
Who pays for the insurance and what does it depend on?
The firms and workers pay for it. It depends on which is more elastic, supply or demand.
Ways the firms can escape the tax
substitute capital (machines) for labor
move overseas
shut down
Ways the firms can escape the tax
costs of leaving the labor force are high
Demand more elastic =
more tax paid by workers (rarely the other way around)
With Commodity Taxes (think of graph)
Consumer + producer surplus is maximized (bigger)
Without Commodity Taxes (think of graph)
Consumer + producer surplus is smaller, and tax revenues and deadweight loss comes into play
Elasticity of Demand:
Less elastic the demand curve =
lower deadweight loss
Elasticity of Demand:
Demand is elastic =
Demand is inelastic =
more lost gains from trade (deadweight loss)
fewer lost gains from trade
Elasticity of Supply:
less elastic the supply curve =
lower deadweight loss
Elasticity of Supply:
Supply is elastic =
Supply is inelastic =
more lost gains from trade
fewer lost gains from trade
Subsidy
A reverse tax; government gives money to consumers or producers (instead of the consumers and producers giving the government money)
Effects are very similar with…
subsidies and normal taxes
Key Points
Who gets the subsidy doesn’t depend…
on who gets the check from the government
Key Points
Who benefits from a subsidy does depend…
on the relative elasticities of the demand and supply
Key Points
Subsides must be paid for by…
Taxpayers (creates deadweight loss)
Subsidy on Graph
Producing goods when cost exceeds its value =
waste
Subsidy on Graph
Bears the burden of a tax =
receives benefit of a subsidy
Subsidy on Graph
when demand is more elastic =
suppliers bear more tax and receive more benefit of a subsidy
Note 
Flashcard (25)