Unit 2: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2015

Trade and Taxes Copyright ACDC Leadership 2015

Review $22 20 18 16 14 Calculate the area of: P Consumer Surplus Producer Surplus Total Surplus P $22 20 18 16 14 S CS CS= $40 PS= $20 Total= $60 PS D 20 Q Copyright ACDC Leadership 2015

Limits on Trade World Price- Countries can buy products at their own domestic price or they can buy the products at a cheaper world price Tariff- Tax on imports that increases the world price Quota- a limit on number of imports. Purpose of tariffs and quotas: To protect domestic producers from a cheaper world price. To prevent domestic unemployment Copyright ACDC Leadership 2015

International Trade and Quotas Identify the following: CS with no trade PS with no trade Amount we import at world price (PW) PS if we trade at world price (PW) CS if we trade at world price (PW) If government tariff leads to a world price of PT, how much is imported and what is the CS and PS? 1.H 2.TLI 3.Q5-Q1 4. T 5.HIJKLMNRS 6. Import Q4 – Q2, PS is T, CS is HIJK This graphs show the domestic supply and demand for grain. The letters represent area. Copyright ACDC Leadership 2015

6. CS gets smaller and PS gets bigger 1.H 2.TLI 3.HIJKLMNRS 4.T 5.Q5-Q1 6. CS gets smaller and PS gets bigger Copyright ACDC Leadership 2015

Excise Tax = A per unit tax on producers Excise Taxes Excise Tax = A per unit tax on producers For every unit made, the producer must pay $ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: Cigarettes “sin tax” Alcohol “sin tax” Environmentally Unsafe Products Etc. 9 Copyright ACDC Leadership 2015

Government sets a $2 per unit tax on Cigarettes Excise Taxes Supply Schedule Government sets a $2 per unit tax on Cigarettes P P Qs $5 140 $4 120 $3 100 $2 80 $1 60 S $5 4 3 2 1 D Q 10 Copyright ACDC Leadership 2015 40 60 80 100 120 140

Government sets a $2 per unit tax on Cigarettes Excise Taxes Supply Schedule Government sets a $2 per unit tax on Cigarettes P P Qs $5 $7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 S $5 4 3 2 1 D Q 11 Copyright ACDC Leadership 2015 40 60 80 100 120 140

Tax is the vertical distance between supply curves Excise Taxes STAX Supply Schedule P P Qs $5 $7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 S $5 4 3 2 1 Tax is the vertical distance between supply curves D Q 12 Copyright ACDC Leadership 2015 40 60 80 100 120 140

Identify the following: Excise Taxes STAX Identify the following: Price before tax Price consumers pay after tax Price producers get after tax Total tax revenue for the government before tax Total tax revenue for the government after tax P S $5 4 3 2 1 1.$3 2.$4 3.$2 4.$0 5.$160 D Q 13 Copyright ACDC Leadership 2015 40 60 80 100 120 140

Tax Practice CS Before Tax PS Before Tax CS After Tax PS After Tax Tax Revenue for Government Deadweight Loss assuming society wants Q2 produced Amount of tax revenue producers pay 1.ABCD 2.HFEG 3.A 4.G 5.BCHF 6.DE 7.HF Copyright ACDC Leadership 2015

2012 Question 18 D 15 Copyright ACDC Leadership 2015

2012 Question 19 D 16 Copyright ACDC Leadership 2015

A

Excise Tax P $14 12 11 8 S D 10 12 Q Copyright ACDC Leadership 2015

Excise Tax 12 P Stax S $14 11 Pc 8 Pp D 12 10 Q Calculate Tax Per Unit Total Tax Revenue Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures Total Revenue for firms P Stax $14 12 11 8 S Pc Pp D 10 12 Q Copyright ACDC Leadership 2015

Excise Tax Calculate CS Before Tax Total Expenditures Before Tax Tax Per Unit Total Tax Revenue that goes to Government Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures after tax Total Revenue for firms after tax CS After Tax DWL Copyright ACDC Leadership 2015

Tax Incidence Who ends up paying for an excise tax? 21 Copyright ACDC Leadership 2015

EXCISE TAX ON MILK $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q Demand- Inelastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 22 Copyright ACDC Leadership 2015

EXCISE TAX ON MILK $2 TAX on Producers 5 P S1 $10 8 7 6 4 2 S D 9 10 Q $6.50 =Pconsumers Amount Consumers Pay $2 TAX on Producers $4.50 = Pproducers Amount Producers Pay D 9 10 Q Quantity Doesn’t Fall VERY Much!!! 23 Copyright ACDC Leadership 2015

EXCISE TAX ON BEEF $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q Demand- Elastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 24 Copyright ACDC Leadership 2015

EXCISE TAX ON BEEF $2 TAX on Producers 5 P S1 $10 8 S 6 4 2 Pc Pp D 10 DWL? Pp D 7 10 Q Quantity Falls A lot!!! 25 Copyright ACDC Leadership 2015

EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7 CS After Pconsumers = $7 Tax per Unit? Total Tax Revenue? Tax paid by consumers? Tax paid by producers? Total spending? Revenue for businesses? Pproducers = $4 D 20 30 Q 26 Copyright ACDC Leadership 2015

EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7 CS After Pconsumers = $7 Tax per Unit = $3 Total Tax Revenue = $60 Tax Paid by Consumers = $40 Tax Paid by Producers = $20 Total Spending = $140 Revenue for Businesses=$80 Pproducers = $4 D 20 30 Q 27 Copyright ACDC Leadership 2015

Tax Incidence (Who pays?) ST S ST S ST S ST S ST S D D D D D Perfectly Inelastic Relatively Inelastic Unit Elastic Relatively Elastic Perfectly Elastic Tax burden paid entirely by consumers Tax burden mostly on consumers Tax burden shared by consumers and producers Tax burden mostly on producers Tax burden paid entirely by producers Copyright ACDC Leadership 2015

2008 Audit Exam 18.B