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

2. 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.

3. Analysis of a $1/unit excise tax

4. A $1/unit excise tax is enacted

5. What happens to the demand curve?

6. Nothing happens to the demand curve!

7. What happens to the supply curve?

8. The supply curve shifts up by $1/unit!

9. Result: price paid by buyers goes up and quantity sold goes down

10. Result: price paid by buyers goes up by LESS than the tax!

11. Welfare Analysis Producer surplus Consumer surplus

12. Welfare Effect of tax: consumer surplus falls New consumer surplus Old consumer surplus

13. Welfare Effect of tax: producer surplus falls New producer surplus Old producer surplus

14. Welfare effect of tax: tax revenue goes up Tax revenue

15. Welfare effect of tax: fall in surplus is greater than tax revenue Tax revenue Consumer Surplus Producer Surplus

16. Welfare effect of tax: total welfare goes down “Dead-weight” loss of tax Consumer and Producer Surplus and Tax Revenue