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26 Cards in this Set
- Front
- Back
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Excise Tax
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a tax charged on each unit of good or service sol
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Effects of an Excise tax
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Increases the price paid by buyer
decreases the price received by producer creates a wedge btw the two |
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Tax on seller (effect of supply and demand)
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Pushes supply curve upwards, increases price
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Tax on buyer (effect on supply and demand)
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Pushes demand curve down, decreases price
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Incidence of a Tax
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A measure of who really pays/bears the burden of the tax. Depends on elasticity
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Tax on elastic supply w/ inelastic demand (ex. gas)
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Burden falls mainly on consumers
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Tax on elastic demand w/ inelastic supply (ex. parking spaces)
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Burden falls mainly on producers
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How does elasticity influence the effect of a tax?
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Which ever is less elastic/more inelastic will bear most of the cost since there are fewer substitutes available
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What determines the incidence of a tax?
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Elasticity, not who pays it (if equal elasticity then the tax is basically split btw the two)
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What is the revenue of a tax?
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The area of the rectangle below the demand and above the supply curves.
Height=tax wedge btw the two Width=quantity transacted under the tax |
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If the eq. price is $80, what would be the new price w/ a $20 tax?
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Supply=$70
Demand=$90 |
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Would increasing the tax result in greater revenue collected?
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No because it will reduce the quantity sold/bought. Can actually reduce revenue.
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What is the effect of a tax and producer and consumer surplus?
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Reduces them both
rectangle above market eq=reduced consumer surplus below eq=reduced producer surplus triangle=deadweight loss (NOT collected) |
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Deadweight loss associated with taxes are larger with (elastic or inelastic) goods
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Elastic
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What can result in zero deadweight loss from taxes?
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Perfectly inelastic supply and demand
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What are the two tax fairness principles?
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Benefits Principle (tax those who benefit the most)
Ability-to-Pay Principle (pay according to ability) |
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Utility
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a measure of satisfaction the consumer derives from consumption
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Shape of a Utility Function
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Upward slope, that levels off at the top and eventually falls
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Shape of a Marginal Utility Curve
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Downward sloping, can be negative
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Marginal Utility
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The difference btw the utility of each additional unit
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Principle of Diminishing Marginal Utility
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Each successive unit consumed will provide less utility than the previous
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Optimal Consumption Bundle
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The consumption bundle that maximizes total utility (highest #)
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Marginal Utility Per Dollar
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The additional utility from spending one more dollar on that good
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How do you calculate marginal utility per dollar?
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MU/Price
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Optimal Consumption Rule
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Consumer maximizes utility with the bundle in which marginal utility per dollar is equal
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Substitution Effect and the Income Effect
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Both affect MU
Substitution: if one becomes cheap, will buy more until MU/$ is equal again Income: change in purchasing power (only for items that take up majority of income like houses and food) |
