Commodity Taxation and Subsidies

Vocabulary flashcards covering key terms related to taxes, subsidies, elasticities, and deadweight loss from the lecture notes.

Tax Incidence

The study of who ultimately bears the burden of a tax, determined by the relative elasticities of demand and supply.

Commodity Taxation

A per‐unit tax on a good that raises government revenue but creates deadweight loss by reducing gains from trade.

Deadweight Loss (Taxation)

The reduction in total surplus caused by a tax reducing the market quantity below the efficient level.

Tax Wedge

The gap between the price buyers pay and the price sellers receive; equal in size to the per‐unit tax.

Tax on Producers

A levy paid by sellers that shifts the supply curve upward by the tax amount, raising the buyer price and lowering the seller’s net price.

Tax on Consumers

A levy paid by buyers that shifts the demand curve downward by the tax amount, lowering the seller price and raising the buyer’s total price.

Elasticity and Tax Burden

The more elastic side of the market can avoid more of the tax; the more inelastic side bears more of it.

Elastic vs. Inelastic Demand and DWL

Deadweight loss from a tax is larger when demand or supply is more elastic and smaller when they are inelastic.

Subsidy

A reverse tax in which the government gives money to buyers or sellers, lowering their effective price.

Subsidy Wedge

The difference between the price sellers receive and the price buyers pay; equal in size to the per‐unit subsidy.

Subsidy Incidence

The distribution of a subsidy’s benefits; the more inelastic side of the market receives the larger share.

Deadweight Loss (Subsidy)

Inefficiency created by a subsidy because some trades occur where cost exceeds value, expanding quantity beyond the efficient level.

Supply Curve

Graph showing the marginal cost of producing each unit of a good.

Demand Curve

Graph showing buyers’ marginal willingness to pay (value) for each unit of a good.

Mortgage Subsidy Example

Government‐funded mortgage subsidies raise housing demand, bid up home prices, and channel excessive resources into home construction.