Kinh tế vi mô FTU - Lecture 4

Lecture 4 Impact of tax policy on equilibrium price and quantiy Content Tax incidence Elasticity and Tax incidence The costs of Taxation Elasticity and Tax Incidence Tax incidence is the manner in which the burden of a tax is shared among participants in a market. Tax incidence is the study of who bears the burden of a tax. Taxes result in a change in market equilibrium. Buyers pay more and sellers receive less, regardless of whom the tax is levied on. Figure A Tax on Buyers Price of Ice-Cream Price Cone buyers pay $3.30 Price 3.00 2.80 without tax Price sellers receive Supply, S1 Equilibrium without tax Tax ($0.50) A tax on buyers shifts the demand curve downward by the size of the tax ($0.50). Equilibrium with tax D1 D2 0 90 100 Quantity of Ice-Cream Cones Figure A Tax on Sellers Price of Ice-Cream Price Cone buyers pay $3.30 3.00 Price 2.80 without tax S2 Equilibrium with tax S1 Tax ($0.50) A tax on sellers shifts the supply curve upward by the amount of the tax ($0.50). Equilibrium without tax Price sellers receive Demand, D1 0 90 100 Quantity of Ice-Cream Cones Figure Size of tax Price Supply Price buyers pay Size of tax Price without tax Price sellers receive Demand 0 Quantity with tax Quantity without tax Quantity How a Tax Affects Market Participants A tax places a wedge between the price buyers pay and the price sellers receive. Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax. The size of the market for that good shrinks. How a Tax Affects Market Participants Tax Revenue T = the size of the tax Q = the quantity of the good sold T Q = the government’s tax revenue