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Introduction - ZoneCours

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Economic Problems and Policy Analysis

           HEC Montreal

             Theme 04
  Supplement on taxes and subsidies




                              By Pascal Bédard
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                  Clickers

• Clickers key: TBD

• To vote wireless or Internet, connect to
  www.rwpoll.com and use: p0206
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           Who pays the tax?

• Legal obligation of a tax

• Incidence of a tax

• Burden of a tax or of taxes in general
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                  Taxing producers
• A tax of t$/unit paid by suppliers shifts the supply curve vertically by
  t$
• Consumer surplus decreases as price goes up and quantity demanded
  decreases
• Producer surplus decreases as quantity supplied and price received
  decrease
• Government revenue of (Pt-MC)*Qt is created
• Social loss of green triangle created
• Light blue region is tax incidence on consumers
• Dark blue region is tax incidence on producers
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                 Taxing consumers
• A tax of t$/unit paid by consumers shifts the demand curve vertically
  by t$
• Consumer surplus decreases as actual price goes up and quantity
  demanded decreases
• Producer surplus decreases as quantity supplied and price received
  decrease
• Government revenue of (Pt-MC)*Qt is created
• Social loss of green triangle created
• Light blue region is tax incidence on consumers
• Dark blue region is tax incidence on producers
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                   Net loss

• After taxing a market, there is a net
  reduction of exchanged units

• Some units WOULD respect the condition
  value >= cost, but these units are not
  produced/consumed
  – Inefficient!
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Here is the supply in a market of 3 suppliers. The 3rd producer is
able to reduce his production costs from 20$ to 10$ to produce 5
    units... What is the new producer surplus of this market?

1. 50$
                                     33%        33%        33%
2. 75$
3. 100$




                                      1.          2.          3.
                                                10




    Elasticity and tax incidence

• The most inelastic absorbs most of the tax!

• The burden falls on the agents who are most
  « stuck » in the market!
                                       11
P
          Inelastic supply

                   S




    Tax



                                   D

             Burden falls mostly
             on suppliers

                                   Q
                                             12
P
          Inelastic demand

                        O




    Tax


                   Burden falls mostly
                   on « demanders »

               D


                                         Q
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     Who REALLY pays a tax?

• While we often hear questions of “is this a
  tax on consumers or on firms?”, it is clear
  that the fundamentals of the market are
  more important to grasp the issue…

• So, when someone says “firms just pass the
  tax on to consumers”, you can now ask
  whether you think is true or not!
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                     Subsidies

• Same but different
  – Will bring demand or supply « too far »
  – Units will be produced/consumed for which
    value < cost
     • Inefficient


• See online documents (ppt and excel) in
  week 3 on ZoneCours…
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        Which is more elastic?
1. Labour demand
                    33%   33%    33%
2. Labour supply
3. Taxable income




                     1.    2.     3.
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  Who gets the heaviest burden of
  various taxes on corporations?
1. Owners of that
                    33%   33%   33%
   firm’s stock
2. Top executives
3. Employees




                    1.     2.    3.
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                 Next class

• Theme 05: public goods (chap 12)

• Have a DETAILED look at recent mid-
  terms

• In-class assignment 2
  – Pre-read on ZoneCours just to get a glimpse

				
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posted:10/16/2012
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