Ch 7 Flashcards
An excise tax on a unit of a good produced and sold
An indirect tax charged on the sale of a particular good, which is not directly paid by individual consumers, however, it can be passed to them by producers
What happens when excise tax is imposed on production?
Sellers raise a minimum price by $, or % amount of the excise tax at every unit of a good sold
Raises price for consumers and reduce price received by sellers
Wedge =
Price paid by buyers (Pc) - price received by sellers (Ps)
Excise taxes by governments will make MB………
> MC at market quantity
What portion of the excise tax is paid by consumers and sellers respectively?
Pc - P* paid by consumers
P* - Ps paid by sellers
Incidence of a tax
A measure of who pays it
What determines the tax burden between buyers and sellers?
Price elasticity of supply and demand
When price elasticity of supply is higher than the price elasticity of demand…….
An excise tax falls mainly on consumers
When the price elasticity of demand is higher than the price elasticity of supply……….
An excise tax falls mainly on sellers
What determines the incidence of an excise tax?
Elasticity
What will be the effect of doubling per-unit excise tax on tax revenues collected?
If Supply and demand are very elastic, the doubling will reduce tax revenue collected because the loss of tax revenue due to decrease in quantity exchanged is larger than the gain of the tax revenue
