DifficultTopicsinMicroeconomicsTaxanalysis.pptVIP

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. Determine the welfare effects of a well-known type of public policy - taxation. Relate tax incidence to demand and supply elasticities. Analysis of a $1/unit excise tax A $1/unit excise tax is enacted What happens to the demand curve? Nothing happens to the demand curve! What happens to the supply curve? The supply curve shifts up by $1/unit! Result: price paid by buyers goes up and quantity sold goes down Result: price paid by buyers goes up by LESS than the tax! Welfare Analysis Producer surplus Consumer surplus Welfare Effect of tax: consumer surplus falls New consumer surplus Old consumer surplus Welfare Effect of tax: producer surplus falls New producer surplus Old producer surplus Welfare effect of tax:tax revenue goes up Tax revenue Welfare effect of tax:fall in surplus is greater than tax revenue Tax revenue Consumer Surplus Producer Surplus Welfare effect of tax: total welfare goes down “Dead-weight” loss of tax Consumer and Producer Surplus and Tax Revenue