Tolic 4: Efficiency And The Incidence Of Tax Flashcards
(14 cards)
How do we distinguish between value and price?
- VALUE is what the buyer gets
* PRICE is what the buyer pays
A sales tax (e.g. GST) always shifts the ____ to the ____.
A sales tax always shifts the SUPPLY CURVE to the LEFT.
What effect does a sales tax have on the demand-supply graph of a good that is price elastic?
- Sales tax shifts SUPPLY CURVE to the LEFT
- Creates a shortage because quantity supplied decreases while quantity demanded stays the same.
- The new market price will rise and the quantity sold will fall (according to the law of demand)
An income tax always shifts ____ to the ____.
An income tax always shifts the DEMAND CURVE to the LEFT.
What is the burden of tax on buyers and sellers?
- After tax consumers always PAY MORE
* After tax supplier always pays less
When there is a sales tax on an inelastic good, who carries the burden of tax more?
When there is a sales tax on an elastic good, the consumer carries the burden more (bigger consumer portion on the graph).
Define marginal benefit
Marginal benefit refers to the maximum price that people are willing to give up for one more unit of good or service.
The consumer will buy one more unit of a good or service if its price is less than or equal to the value the consumer places on it.
The ___ curve is a marginal ___ curve in a competitive market.
A DEMAND CURVE is a MARGINAL BENEFIT CURVE in a competitive market.
Consumer surplus
The difference between the price consumers are prepared to pay for a product and the market price.
When customers buy something for less than it is worth to them, they receive a consumer surplus.
Where is the consumer surplus on the marginal benefit/demand curve?
The area surrounded by the price axis, the market price level and the demand curve.
Define producer surplus
Producer surplus is the difference between the price supplies are willing to supply at and the market price.
On a diagram, it is the area surrounded by the price axis, the market price level and the supply curve.
What are the characteristics of an efficient/competitive market? (4)
1) When there is market equilibrium
2) Where the marginal cost curve (supply curve) meets the marginal cost curve (demand curve)
3) Quantity and resource allocation is efficient when marginal cost equals marginal benefit
4) Consumer surplus and producer surplus is maximised
Define tax incidence
Tax incidence is the division of the burden of a tax between the buyer and the seller.
What effect does the incidence of tax have on efficiency?
- Efficiency is when MB = MC but a tax placed a wedge between the buyers’ price (MB) and the sellers’ price (MC)
- The equilibrium quantity is less than efficient and consumer surplus and producer surplus both shrink.
