Difficult Topics in Microeconomics: Tax analysis Luis Fernandez And Teresa Fischer.

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Presentation transcript:

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