Understanding the Impact of Taxes on Markets

These flashcards cover the key concepts from the lecture on how taxes affect market efficiency, specifically regarding the taco tax example, consumer and producer surplus, and the implications of taxation on market transactions.

What is consumer surplus and how is it represented on a supply and demand graph?

Consumer surplus is the area between the demand curve and the price level, representing the benefit consumers receive when they pay less than their willingness to pay.

What happens to the supply curve when an excise tax is imposed?

The supply curve shifts upward by the amount of the tax, reflecting the increased costs for producers.

What are the economic effects of a taco tax on consumers and producers?

Both consumers and producers share the burden of the tax; consumers pay a higher price and producers receive a lower price than before the tax.

What is deadweight loss in relation to taxes?

Deadweight loss occurs when the tax leads to fewer transactions than would occur in a tax-free market, causing lost economic efficiency and potential surplus.

What does statutory incidence refer to?

Statutory incidence refers to who is legally responsible for paying the tax, but it does not determine who actually bears the economic incidence.

How does the introduction of a tax lead to a distortion in market prices?

A tax creates a wedge between what consumers pay and what producers receive, leading to deviations from the equilibrium price and quantity.

What remains as government revenue after a tax is imposed?

Government revenue is the tax amount multiplied by the quantity sold, from which some consumer surplus and producer surplus are transferred to the government.

In a tax scenario, why might some potential transactions not occur?

Due to the tax wedge created by the tax, some transactions that would have been beneficial are not made, leading to deadweight loss.

What happens to total surplus in a market after a tax is enacted?

Total surplus decreases because the tax leads to deadweight loss, reducing the number of efficient transactions.

If the government changes who pays the tax, does it affect the economic incidence?

No, changing the statutory incidence (who is said to pay the tax) does not affect the overall economic incidence; prices still adjust to reflect the tax burden.