TAXES! Why do I tax all the time?

How Taxes Affect Market Outcomes Market not efficient – Total surplus not maximized When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burden.

Tax incidence When the burden of a tax is shared among participants in a market

If there is a sales tax on buying these candy worms, it’s not just the kid with worms who feels the burden of the tax

PriceQdQs $15010 $24020 $330 $42040 $51050 CANDY WORM MARKET

Let’s say there is a $0.50 tax on buying candy worms 3 questions must be answered to figure out the tax incidence Question 1: Does the tax affect the supply curve or the demand curve? Question 2: Which way does the curve shift? Question 3: How does the shift affect equilibrium?

S1 What happens if there is a $0.50 tax on the buyer? D1 P Q

Your turn

3 questions must be answered to figure out the tax incidence Question 1: Does the tax affect the supply curve or the demand curve? Question 2: Which way does the curve shift? Question 3: How does the shift affect equilibrium? Assume the government wants to reduce the amount of sugar Americans are consuming. So, they enforce a excise tax of $1.00 for every candy worm produced.

S1 What happens if there is a $0.50 tax on the seller? D1 P Q

Elasticity and Tax Incidence In what proportions is the burden of the tax divided? How do the effects of taxes on sellers compare to those levied on buyers? The answers to these questions depend on the elasticity of demand and the elasticity of supply.

How the Burden of a Tax Is Divided Quantity 0 Price Demand Supply Tax Price sellers receive Price buyers pay (a) Elastic Supply, Inelastic Demand the incidence of the tax falls more heavily on consumers When supply is more elastic than demand... Price without tax than on producers.

How the Burden of a Tax Is Divided Quantity 0 Price Demand Supply Tax Price sellers receive Price buyers pay (b) Inelastic Supply, Elastic Demand than on consumers. 1. When demand is more elastic than supply... Price without tax the incidence of the tax falls more heavily on producers...

Your turn…again

Luxury Tax

In 1990, Congress adopted a new luxury tax on items that only the rich could afford. The goal of this tax is to raise revenue from those who could easily afford to pay Answer this question: Does the price incidence truly affect buyers more? Write a short answer and provide a supply and demand curve to further explain your answer.