Chapter 1-6: Introduction to Taxation

Flashcards covering key concepts related to taxation, including definitions of surplus, effects of taxes on supply and demand curves, determination of tax incidence, and deadweight loss, as discussed in Chapters 1-6 of the lecture.

What are two main reasons economists might want to know the elasticity of tobacco demand when a tax is imposed?

To guide how much tax revenue they can raise and to predict the impact on reducing smoking.

How is consumer surplus defined?

It is the difference between the price a consumer would have been willing to pay and the price that they actually paid.

How is producer surplus defined?

It is the difference between the price a producer received and the price they would have been willing to sell for.

Can you give an example of a tax that is not per unit, as discussed in the lecture?

A lump-sum tax (fixed amount regardless of units) or a sales tax (a percentage of the price).

In the Berkeley 1¢ per ounce sugary soda tax example, if the average price increased by 0.4¢ for the buyer, how much did the seller ultimately keep per ounce compared to before the tax?

The seller ultimately kept 0.6¢ less per ounce, as they received 0.4¢ more from the buyer but had to pay 1¢ to the government.

When a per-unit tax is imposed on sellers, how does the supply curve change graphically?

The supply curve shifts inward (or upward) by the amount of the tax.

When a per-unit tax is imposed on sellers, what does the inward shift of the supply curve imply about the price sellers require for any given quantity?

At any given quantity, sellers will now demand a higher price (specifically, the old price plus the tax) to supply that quantity.

When a per-unit tax is imposed on sellers, what does the inward shift of the supply curve imply about the quantity sellers are willing to sell at any given price?

At any given price, suppliers are now willing to sell less into the market.

According to the demand and supply model, what is the effect of a per-unit tax on the equilibrium quantity transacted in the market?

The equilibrium quantity will decrease.

When a per-unit tax is imposed, how do the price paid by the buyer and the price kept by the seller change relative to the pre-tax equilibrium price?

The price paid by the buyer goes up, and the price kept by the seller goes down.

What is meant by the 'incidence of the tax'?

The incidence of the tax refers to how the burden of the tax is shared between the buyer and the seller.

If a tax is legally imposed on the seller, who bears the burden of the tax?

Both the buyer and the seller share the burden, even though the tax is imposed on the seller.

On a supply and demand graph with a per-unit tax, how is the government's tax revenue represented?

It is represented by a rectangle where the height is the tax amount (T) and the width is the new equilibrium quantity.

What is deadweight loss (also known as excess burden) in the context of taxation?

It is the loss of surplus (consumer and producer) that occurs when a tax reduces the quantity transacted, and this lost surplus is not replaced by anything (e.g., tax revenue).

How does a tax typically affect total social surplus?

A tax reduces social surplus because it creates a deadweight loss.

If the seller's original inverse supply curve is P = Q, and a per-unit tax 't' is imposed on the seller, what is the new inverse supply curve that reflects the seller's signal?

The seller's signal is P - t, so the new supply curve is P - t = Q, which can be rearranged to P = Q + t.

In the algebraic model where the pre-tax transaction price was given as P = AB/(1+B), how does a per-unit tax 't' on the seller affect the equilibrium transaction price paid by the buyer?

The equilibrium transaction price paid by the buyer becomes P = (AB + t)/(1+B), which is higher than the pre-tax price.

Does it matter for the incidence of the tax (who ultimately bears the burden) whether the tax is legally imposed on the buyer or the seller?

No, the model predicts that the incidence of the tax is the same whether it is legally imposed on the buyer or the seller; the person sending the money to the government is irrelevant.

When a per-unit tax is imposed on the buyer, how does the demand curve change graphically?

The demand curve shifts inward (or downward) by the amount of the tax.

If the original inverse demand curve is P = A - Q, and a per-unit tax 't' is imposed on the buyer, what is the new price the buyer truly considers, and how does this affect the effective demand curve?

The buyer considers P + t. The new effective demand curve becomes P = A - t - Q, meaning for any given quantity, the buyer is willing to pay 't' less to the seller.