Unit 4: Price Controls

indirect taxes

indirect taxes

taxes imposed on spending goods & services

• paid partly by consumers & to the gov’t by producers

Types of Ind. Taxes

• excise taxes: taxes imposed on particular goods n’ services

  • ie. gas, cigarettes, + alcohol

• taxes on spending on (almost) all goods n’ services

  • ie. general sales taxes, value-added taxes

Types of Excise Taxes

• specific taxes: fixed amount of tax/unit of a good or service sold

• ad valorem taxes: fixed percentage of price of a good or service

  • amount of tax incr. as price of good incr.

direct taxes

taxes w/ a payment of them by taxpayers to gov’t

Why Gov’ts Impose Ind. Taxes

• source of gov’t revenue

  • as PED decr., gov’t revenue incr; therefore, more taxes = more gov’t revenue

• method to discourage consumption of goods harmful for the individual

  • consumption of goods (ie. cigarettes/alcohol) can be reduced via ind. taxes

• use of redistributing income

  • taxes w/ focus on luxury goods can be taxed against high-income earners

  • payment of a tax on purchase = decr. post-tax income = lower class difference

• method to improve allocation of resources via correcting negative externalities

  • market imperfections (form of neg. externalities) are remedied via ind. taxes

Market Outcomes w/ Ind. Taxes

• Qeq. decreases (Q* → Qt)

• Peq increased (P* → Pc)

• consumer expenditure changes (P* x Q* → Pc X Qt)

• price received by firms decreases (P* → Pp)

• firm revenue decreases (P* x Q* → Pp X Qt)

• gov’t receives tax revenue (Pc-Pp)Qt

• under allocation of resources (Qt <Q*)

Consequences of Ind. Taxes

• Consumers

  • increase Pgood

  • decrease Qbought

• Producers (firms)

  • decrease in Preceives

  • decrease in Qoutput-sold

  • decrease in Revenue

• Gov’t

  • revenue gained (Pc-Pp)Q

• Workers

  • decrease in output (Q*→ Qt)

  • fewer workers needed = unemployment

• Society as a Whole: Consumer + Producer Surplus

  • under allocation of resources

  • recudes consumers and produer surpluses

    • some to gov’t, some to welfate loss

• Society as a Whole: Welfare Loss

  • received from consumer & producer surpluses

  • result of underproduction (MC>MC)