ECO 202 Chapter 6 - Compatibility Mode

Page 1: Taxes & Subsidies

• Introduction to the concept of death and taxes in a humorous context.

Page 2: Births & Tax Incentives

• Evidence suggests more children born in late December than early January.

• Births seem correlated with maximizing tax deductions.

• Reference: David Leonhardt, The New York Times.

Page 3: Learning Objectives

• Use wedge analysis to show taxes decrease traded quantities and create deadweight losses.

• Show subsidies increase traded quantities and also create deadweight losses.

• Understand who bears the tax burden based on elasticities, not who pays the check.

• Utilize supply and demand analysis for various scenarios.

Page 4: Understanding Taxes

Commodity Tax

• A tax levied on goods.

• Key truths:

  1. Tax payment does not depend on who writes the government check.

  2. Tax burden depends on relative elasticities of demand and supply.

  3. Such taxes raise government revenue but create deadweight losses.

Page 5: Tax Incidence

• Tax on sellers shifts the supply curve up by the tax amount.

• Buyers pay more than before, sellers receive less.

• Illustrates the price changes before and after the tax imposition.

Page 6: Analyzing a $1 Tax on Apple Sellers

• A $1 tax shifts supply curve upward by $1.

• Price increases by less than the full tax value.

Page 7: Analyzing a $1 Tax on Apple Buyers

• A $1 tax shifts demand curve downward by $1.

• Similar outcomes as the tax on sellers; price increase is less than the tax.

Page 8: Tax Wedge Illustration

• The tax wedge graphically represents tax impact.

• Example: $1 tax leads to a price buyers pay being higher than what sellers receive.

Page 9: Tax Burden Analysis

• Tax burden division depends on the relative elasticities of supply and demand.

• The less elastic side bears a greater share of the tax load.

Page 10: Recap of Tax Humor

• Similar humorous reiteration of taxes and deadlines.

Page 11: Elasticity Impact on Tax Burden

• When demand is more elastic than supply, sellers bear more tax burden.

• Utilizes graphical representation to demonstrate impact.

Page 12: Tax Burden When Supply is Elastic

• When supply is more elastic than demand, buyers bear more of the tax.

• Description includes graphical analysis.

Page 13: Relationship & Tax Analogy

• Question posed about driving commitment in relationships as a metaphor for tax burden.

Page 14: Tax Burden Applications

• Implications for health insurance mandates and potential wage reductions.

• Firms might replace workers with machines to cut costs.

Page 15: Cigarette Tax Analysis

• Discussion on cigarette tax effectiveness depending on manufacturers' ability to dodge taxes.

• National taxes seen as better at discouraging smoking.

Page 16: Tax Effects Overview

• Tax impacts consumer surplus, deadweight loss, and producer surplus.

• Demonstrates quantitative impacts of taxes through examples.

Page 17: Tax Revenue Question

• Interactive question on potential tax revenue collected from gadgets.

Page 18: Deadweight Loss and Elasticity

• Deadweight losses increase as demand elasticity increases.

• Tax impact is minimized with inelastic demand.

Page 19: Understanding Subsidies

• Description of subsidies as reverse taxes where the government subsidizes consumers or producers.

• Key insights about subsidies include their impact on elasticity and taxpayer funding.

Page 20: Subsidy Wedge Dynamics

• Subsidies create a wedge between prices received by sellers and paid by buyers.

• Example illustrates a $1 subsidy analysis.

Page 21: Agricultural Water Subsidies

• Discussion about who benefits most from water subsidies in California.

• Examines demand and supply elasticity around cotton.

Page 22: Benefit Distribution of Subsidies

• Suppliers benefit more from subsidies when demand is more elastic than supply.

Page 23: Case Study - Cirque du Soleil Subsidy

• The debate over the value and purpose of a government loan to a production company.

Page 24: Wage Subsidy Effects

• Illustrates how a wage subsidy can increase employment while also costing the government.

• Graphical depiction of labor demand and supply shifts due to subsidy.

Page 25: True/False Statements on Taxation

• Quiz question discussing the implications and correctness of statements on taxation.

Page 26: Elasticity and Tax Burden Question

• Question posed about who bears tax burden based on elasticity of demand and supply.

Page 27: Junk Food Tax Analysis

• Analysis of the effectiveness of a junk food tax in terms of demand elasticity.

• Discusses whether demand should be inelastic to effectively deter consumption.