CHAPTER 19: DISTORTIONARY TAXES AND SUBSIDIES Flashcards
(26 cards)
What is statutory tax incidence?
It refers to the person or entity legally required to pay the tax.
What is economic tax incidence?
The actual division of the tax burden among market participants after price changes.
What determines how the tax burden is split in economic incidence
the relative price elasticities of buyers and sellers.
How do price elasticities affect taxes?
they influence who bears the tax burden, how much revenue is raised, and the DWL created.
How are subsidies related to taxes?
Subsidies are like negative taxes, with similar economic effects but in reverse.
What happens when a per-unit taxs statutory incidence falls on firms
Firms costs rise, supply shifts up, consumers pay more, and firms keep less.
What happens when the taxs statutory incidence falls on consumers?
demand shifts down, consumers pay more, and firms receive less.
Does economic tax incidence depend on who legally pays the tax?
No, it depends on market elasticities, not legal assignment.
What is the relationship between consumer price, firm price, and tax?
pd = ps + t
What is deadweight loss (DWL) from a tax?
Its the loss of total surplus that occurs when a tax reduces trade.
how is DWL measured with quasilinear tastes?
By the drop in consumer and producer surplus after the tax.
What part of the surplus does the government capture?
The tax revenue collected.
What happens to the surplus not captured by the government?
It becomes deadweight loss.
What happens when the statutory incidence of a subsidy is on firms?
Costs fall, supply shifts down, firms receive price + subsidy.
What happens when the statutory incidence of a subsidy is on consumers?
A: Demand shifts up, consumers pay price subsidy.
What is the relationship between firm price, consumer price, and subsidy?
A: ps = pd + s
: Does economic subsidy incidence depend on legal recipient?
A: No, it depends on market conditions, not who receives the subsidy.
What is DWL from a subsidy?
A: The loss of surplus from inefficient extra trade due to the subsidy.
Q: How is DWL from a subsidy measured with quasilinear tastes?
A: Drop in surplus minus the governments cost of the subsidy.
Q: Why does a subsidy cause DWL?
A: It encourages inefficient extra trade.
: What determines who bears more of the tax?
A: The relative price elasticities of supply and demand.
Who bears more of the tax if demand is more inelastic?
A: Consumers.
Who bears more of the tax if supply is more inelastic?
A: Firms.
How is tax revenue calculated?
A: Tax rate quantity sold.
