effects of a tax Flashcards
(21 cards)
What is the effect of a tax on the price buyers pay and the price sellers receive?
A tax creates a wedge between these prices, raising the price buyers pay and lowering the price sellers receive.
How does a tax affect the quantity of goods bought and sold?
A tax reduces the quantity bought and sold in the market.
Does it matter whether a tax is imposed on buyers or sellers?
No, the effects are the same regardless of whether the tax is imposed on buyers or sellers.
What do we measure to determine how a tax affects market participants?
We measure consumer surplus, producer surplus, tax revenue, and total surplus with and without the tax.
Why is tax revenue included in total surplus?
Because it can be used to provide public services such as roads, police, education, etc.
How is tax revenue calculated?
Tax Revenue = Size of the Tax (T) × Quantity Sold (Q).
What is deadweight loss?
The fall in total surplus that results from a market distortion like a tax.
How does a tax create deadweight loss?
When quantity falls from Q1 to Q2 due to the tax, some potential gains from trade among buyers and sellers are not realized, leading to lost gains from trade.
What happens to consumer and producer welfare when a good is taxed?
A tax reduces their welfare; typically, the reduction in consumer and producer surplus exceeds government revenue raised by the tax.
In summary, what does deadweight loss represent in relation to taxation?
It represents the decrease in total surplus due to reduced economic activity caused by taxation.
What is considered in the market for olive oil in Isoland when there is no international trade?
The market consists solely of Isolandian buyers and sellers, with domestic prices adjusting to balance quantity supplied and demanded.
How do we determine if Isoland will be an importer or exporter of olive oil once free trade is allowed?
We compare the current domestic price of olive oil to the world price; if world price > domestic price, Isoland becomes an exporter; if world price < domestic price, it becomes an importer.
What indicates whether a country has a comparative advantage in producing a good?
A country has a comparative advantage if it produces the good at a lower opportunity cost than other countries.
What happens to Isoland’s trade policy when it allows for exports?
The domestic price rises to equal the world price, leading to increased supply and exports.
What are the effects on producers and consumers when Isoland becomes an exporter?
Domestic producers are better off due to higher prices, while domestic consumers are worse off due to higher prices.
What occurs when Isoland becomes an importer of olive oil?
The domestic price falls to equal the world price, leading to increased demand and imports.
How does becoming an importer affect producers and consumers in Isoland?
Domestic consumers benefit from lower prices, while domestic producers are worse off due to reduced prices.
What is one argument for restricting trade related to jobs?
Trade destroys jobs in industries competing against imports.
but
Total unemployment does not rise as imports increase because job losses from imports are offset by job gains in export industries.
What is the national security argument for protecting certain industries from foreign competition?
Industries vital to national security should be protected from foreign competition to prevent dependence on potentially disrupted imports during wartime.
but
Policies should be based on true security needs rather than exaggerated claims by producers seeking protection.
Describe the infant industry argument for temporary protectionism.
New industries argue for temporary protection until they mature enough to compete with foreign firms.
but
It’s difficult for governments to predict which industries will succeed long-term and whether benefits outweigh costs imposed on consumers through import restrictions.
What is the unfair competition argument regarding international trade?
Producers claim their competitors have unfair advantages, like government subsidies that distort competition.
but
They argue that importing subsidized products can benefit consumers more than it harms local producers.
