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Difficult Topics in Microeconomics: Tax analysis

Difficult Topics in Microeconomics: Tax analysis. Luis Fernandez And Teresa Fischer. Teaching Objectives of Tax Analysis. Application of supply and demand analysis. Refute the “fly-paper theory” of tax incidence.

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Difficult Topics in Microeconomics: Tax analysis

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  1. Difficult Topics in Microeconomics: Tax analysis Luis Fernandez And Teresa Fischer

  2. Teaching Objectives of Tax Analysis • Application of supply and demand analysis. • Refute the “fly-paper theory” of tax incidence. • Determine the welfare effects of a well-known type of public policy - taxation. • Relate tax incidence to demand and supply elasticities.

  3. Analysis of a $1/unit excise tax

  4. A $1/unit excise tax is enacted

  5. What happens to the demand curve?

  6. Nothing happens to the demand curve!

  7. What happens to the supply curve?

  8. The supply curve shifts up by $1/unit!

  9. Result: price paid by buyers goes up and quantity sold goes down

  10. Result: price paid by buyers goes up by LESS than the tax!

  11. Welfare Analysis Consumer surplus Producer surplus

  12. Welfare Effect of tax: consumer surplus falls New consumer surplus Old consumer surplus

  13. Welfare Effect of tax: producer surplus falls New producer surplus Old producer surplus

  14. Welfare effect of tax:tax revenue goes up Tax revenue

  15. Welfare effect of tax:fall in surplus is greater than tax revenue Consumer Surplus Tax revenue Producer Surplus

  16. Welfare effect of tax: total welfare goes down Consumer and Producer Surplus and Tax Revenue “Dead-weight” loss of tax

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