W4 Intro to Micro

Tax

A payment to the government on each unit of a good transacted

Tax Func

Raises revenue for governments

Tax Formula

t (Tax) = Pd (Price paid by consumers) - Ps (Price received by producers)

Tax On Suppliers

Sellers only willing to sell if price receive =Ps+t (Shifts supply curve to the left)

Government Intervention on Welfare

1. Taxes may lead to inefficient outcomes -> Deadweight loss, 2. Both sides of market bare part of tax burden

Tax on Consumers

1. Buyers only willing to buy if price = Pd-t, 2.Shifts demand curve to left

Tax Burden

1. Falls more heavily on the side less price elastic , 2. Not determined by who pays tax

Subsidy

A payment from the government to consumers or producers for each unit of good transacted

Subsidy Func

Encourage consumption / production (Negative tax)

Subsidy Formula

s = Ps-Pd

Subsidy Effect

Increase price consumers willing to pay to suppliers

Total Surplus

CS +PS - Subsidy

Price Controls

Used to correct a market outcome they deem unfair (Eg min wage)

Price Floor

Imposes a min price (Binds / effective when set above equilibrium price, creating excess supply (Surplus))

Price Ceiling

Imposes a max price (Binds / effective when set below equilibrium price creating excess demand (shortage))

Quota

Imposes the max quantity traded (Binds at level of quantity traded, regardless of whether above / below equilibrium quantity traded)

Market Revenue

P*Q*