Studied by 5 peopleTags & Description
commodity tax
tax on goods
examples of commodity taxes
alcohol, cigarettes, fuel
What is the first truth about commodity taxation?
who pays the tax doesn't depend on who writes the check to the government
What is the second truth about commodity taxation?
who pays the tax doesn't depend on the relative elasticities of demand and supply
What is the third truth about commodity taxation?
it raises revenue and creates deadweight loss
What is another way to say deadweight loss?
a reduction in the gains from trade
If the government wanted to place a tax on apples, what two ways could they do this?
tax apple sellers $1 for every basket they supply or tax apple buyers for every basket they buy
Who pays a tax is determined by what?
the laws of supply and demand
How do sellers see a tax?
as an increase in prices
What will a $1 tax do to the supply curve?
it will shift it up by 1 at every quantity
A $1 tax will always raise the price by $1: true or false
false
How do you calculate a tax?
price paid by buyers - price received by sellers
What happens when sellers have excess supply?
it creates an incentive to sellers to bring the price down because they want to compete to keep their buyers
As the price falls, what do sellers do?
they supply fewer of the good
What is the wedge shortcut?
driving a tax wedge between the price paid by buyers and the price received by sellers
What determines how the burden of the tax is shared between buyers and sellers?
wedge shortcut
When there is an elastic demand curve...
demanders have a lot of substitutes
What is the relationship between a tax and an elastic demand curve?
can't tax someone with a lot of substitutes because they'll just go and buy the substitute
What happens when supply is more elastic than demand?
suppliers pay less of the tax than buyers
What happens when demand is more elastic than supply?
demanders pay less of the tax than sellers
Note
Flashcard