Taxation and its Economic Impacts

This collection of flashcards encapsulates essential vocabulary and concepts related to taxation and its economic implications, facilitating review and understanding for exam preparation.

Tax Incidence

The distribution of the tax burden between buyers and sellers, determined by the elasticities of demand and supply.

Excise Tax

A tax on a specific good, which drives a wedge between the price consumers pay and the price producers receive.

Deadweight Loss

The loss of economic efficiency when the equilibrium outcome is not achievable or not achieved; represents the total surplus lost due to the tax.

Elastic Demand

Demand is considered elastic if the price elasticity of demand is greater than 1, meaning consumers are highly responsive to price changes.

Inelastic Demand

Demand is inelastic if the price elasticity of demand is less than 1, meaning consumers are less responsive to price changes.

Laffer Curve

A theoretical concept that illustrates the relationship between tax rates and tax revenue, suggesting that beyond a certain point, higher tax rates can lead to decreased revenue.

Tax Revenue

The income gained by the government through taxation, calculated as the tax rate multiplied by the quantity transacted.

Administrative Costs of Taxation

The resources required to collect taxes, which include government expenditures and taxpayer expenditures beyond the tax amount.

Price Elasticity of Demand

The percent change in quantity demanded divided by the percent change in price, indicating how responsive consumers are to price changes.

Price Elasticity of Supply

The percent change in quantity supplied divided by the percent change in price, showing the responsiveness of producers to price changes.

Consumer Surplus (CS)

The difference between what consumers are willing to pay for a good versus what they actually pay, affected negatively by taxes.

Producer Surplus (PS)

The difference between what producers are willing to accept for a good versus what they actually receive, also negatively impacted by taxes.

Tax Wedge

The difference between the price consumers pay and the price producers receive for a good due to the imposition of a tax.

Perfectly Elastic Demand

Demand characterized by consumers willing to purchase any quantity at a specific price, resulting in a horizontal demand curve.

Perfectly Inelastic Demand

Demand characterized by consumers buying the same quantity regardless of price changes, resulting in a vertical demand curve.

Unit Elastic Demand

Demand for which the price elasticity equals 1, indicating proportional responsiveness in quantity demanded to price changes.

Cross-Price Elasticity of Demand

A measure of how the quantity demanded of one good changes in response to the price change of another good.

Income Elasticity of Demand

The responsiveness of quantity demanded to changes in consumer income, measured as the percentage change in quantity demanded divided by the percentage change in income.