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Tax incidence

Tax incidence. What you will learn. How the tax burden is measured. How the tax burden is distributed. Take this challenge. : ___________ burden. = ___________. Price. S. : __________ burden. P 0. = __________. D. Quantity. Q 0. Who bears the tax burden?.

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Tax incidence

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  1. Tax incidence

  2. What you will learn ... How the tax burden is measured How the tax burden is distributed Take this challenge

  3. : ___________burden = ___________ Price S : __________burden P0 = __________ D Quantity Q0 Who bears the tax burden? Suppose the government levies a per-unit tax (t) on a good. Consumers’ (P1-P0) x Q1 S1 t P1 Producers’ (P0-P2) x Q1 P2 Q1

  4. 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 Find the quantity transacted and the equilibrium price! Quantity transacted:____ Equilibrium price:____ How much is the tax burden? 70 $6

  5. If a $2 per-unit tax is levied, what will be the quantity transacted and the equilibrium price? How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100

  6. 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100 What is the total tax burden? How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: = tax rate x quantity transacted = ______________ $2 x 60 = $120

  7. How is the tax incidence shared between consumers and producers? How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100

  8. Consumers’ share of the tax burden: How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100 = ____________________ ($7 - $6) x 60 = $60

  9. Producers’ share of the tax burden: How much is the tax burden? 3 4 5 6 7 8 9 100 90 80 70 60 50 40 40 50 60 70 80 90 100 New demand and supply schedule: 5 6 7 8 9 10 11 80 70 60 50 40 - - 40 50 60 70 80 90 100 = __________________ ($6 - $5) x 60 = $60

  10. S1 Price S t P1 P0 P2 D Quantity Q1 Q0 How is the tax burden distributed? Case One: Ed = Es Consumers’ burden _____ Producers’ burden =

  11. Price S1 P1 S t P0 P2 D Quantity Q1 Q0 How is the tax burden distributed? Case Two: Ed < Es Consumers’ burden _____ Producers’ burden >

  12. Price ($) S1 t S P1 P0 P2 D Quantity Q1 Q0 How is the tax burden distributed? Case Three: Ed > Es Consumers’ burden _____ Producers’ burden <

  13. 50 60 70 80 90 100 90 80 70 60 50 40 50 60 70 80 90 100 Take this challenge The following is the demand and supply schedule for teddy bears: What are the quantity transacted and equilibrium price? Answer: Quantity transacted: _____ units Equilibrium price: _______ 70 $70

  14. 50 60 70 80 90 100 90 80 70 60 50 40 50 60 70 80 90 100 Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 80 90 100 50 60 70 80 90 100 If the government levies a $20 per-unit tax on teddy bears: How many teddy bears will be sold? Hint: How will the demand and supply schedule change? Answer: ______ units 60

  15. Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 70 80 90 100 50 60 70 80 90 100 If the government levies a $20 per-unit tax on teddy bears: What is the total tax burden? Answer: __________________ $20 x 60 = $1,200

  16. Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 70 80 90 100 50 60 70 80 90 100 If the government levies a $20 per-unit tax on teddy bears: How much is the consumers’ tax burden? Answer: ________________________________ = ($80 - $70) x 60 = $600

  17. Take this challenge The following is the demand and supply schedule for teddy bears: 50 60 70 80 90 100 70 80 90 100 110 120 90 80 70 60 - 50 40 70 60 50 40 - 50 60 70 80 90 100 50 60 70 80 90 100 If the government levies a $20 per-unit tax on teddy bears: How much is the producers’ net revenue? Answer: ____________________________________ ____________________________________ = revenue after tax - total tax burden = $80 x 60 - $1,200 = $3,600

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