ECON-110_Chpt 4 (Cont.) & Demand and Supply Practice

• Page 2: Taxation in Chapter 4

• Tax Rates Overview:

  • Progressive Tax:

    • Average tax rate rises with income.

    • Ex: U.S. progressive system: Low-income (10%), Middle-income (15%), High-income (30%).

    • Historical financing through varied rates during WWI.

    • Includes investment income and interest taxes.

  • Proportional Tax:

    • Fixed average tax rate across income levels.

    • Examples: Sales tax, real estate tax.

    • Potentially regressive as it impacts lower-income individuals more significantly.

Page 3: Regressive Taxes and Their Implications

• Regressive Tax:

  • Average tax rate decreases as income increases.

  • Example: Flat charges (e.g., museum fees).

    • Impact differs: $5 entry fee vs income structure leads to a greater impact on lower earners.

  • Related to taxes on cigarettes, alcohol, etc.

  • Economic observations regarding stadium funding show disproportionate burden on lower-income individuals.

Page 4: The Laffer Curve

• Laffer Curve: Describes tax rate and revenue relationship.

  • Tax revenues fall at extremely high and low rates.

  • Optimal tax rates exist where decreasing taxes could increase revenues by enhancing buying behavior.

  • Historical data: Marginal tax rate changes from 70% to 33% led to a 51.4% revenue increase from top earners.

  • Notable shifts in taxpayer concentration amongst high-income earners.

Page 5: Subsidy Basics

• Subsidy Definition:

  • Government payments to buyers/sellers to influence market behavior.

  • Aims to raise demand by making goods/services more affordable.

  • Represented through demand or supply shifts on price equilibrium graphs.

  • Example of rightward shift leads to higher equilibrium price ($10,000 to $12,000).

Page 6: Detailed Analysis of Subsidies

• Subsidy Effects:

  • New equilibrium price adjustments lead to a consumer price reduction while increasing supplier price.

  • Shared benefits of subsidies create access and incentive for both consumers and producers.

Page 7: Comparative Analysis of Subsidies and Taxes

• Subsidy Dynamics:

  • Both consumer and supplier prices differ due to government intervention.

  • Insights into U.S. subsidies, e.g., Alcoa's significant investment and potential layoffs avoidance.

  • Showcases the rightward shift in market supply impacted by subsidies.

Page 8: Tax Implications on Consumers

• Tax and Subsidy Interrelationship:

  • Highlights consumers' experiences with subsidy benefits and governmental mandates.

  • Prices for goods/services reflect different recipient prices and shared benefits.

Page 9: Summary on Taxes vs. Subsidies

• Key Takeaways on Subsidies:

  • Similar pricing impact observed regardless of who is subsidized.

  • The overall demand for goods/services increases, benefiting both suppliers and consumers.

Page 10: Demand Subsidy Practice

• Demand Context:

  • Visual representation showcases shifts in consumer prices under subsidy impacts and total government costs involved in such transitions.

Page 11: Practice Application on Demand Shifts

• Equilibrium Changes:

  • Rightward demand shifts correspond to a higher equilibrium price and quantity reflecting heightened activity in consumer and producer markets.

Page 12: Government Expense Context

• Mapping Government Costs:

  • Outlines structure of government costs in relation to subsidized products and demand equilibrium shifts.

Page 13: Sales Tax Dynamics

• Sales Tax and Inelastic Demand Context:

  • Examination of market shifts with increased sales taxes on inelastic goods.

  • Result: Gross price impacts lead to lower equilibrium conditions.

Page 14: Effects of Sales Taxes

• Sales Tax Implications:

  • Leftward demand shifts lead to increased consumer prices and lower producer income.

  • Consequences for market equilibrium illustrated.

Page 15: Government Revenue Calculations

• Revenue Analysis:

  • Illustrates potential decreases in consumer and producer surpluses due to tax burdens.

  • Deadweight loss considerations between consumers and suppliers based on elasticity.

Page 16: Excise Taxes Overview

• Excise Tax Implications:

  • Analysis of leftward supply shifts due to inelastic supply behaviors.

  • Resulting economic adjustments impact market equilibrium.

Page 17: Supplier Tax Effects

• Visual Representation:

  • Higher consumer prices resulting from supplier-targeted tax implementations.

Page 18: Distribution of Tax Burden

• Tax Burden Analysis:

  • Examination of consumer vs. supplier burden under inelastic supply dynamics.