IB Economics HL Topics Indirect Taxes, Subsidies and Price Controls.
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Transcript of IB Economics HL Topics Indirect Taxes, Subsidies and Price Controls.
IB Economics IB Economics HL TopicsHL Topics
Indirect Taxes, Indirect Taxes, Subsidies and Price Subsidies and Price
ControlsControls
Tax Incidence Tax Incidence (burden)(burden)
►Is a measure of the Is a measure of the consequences of a tax on all consequences of a tax on all the affected partiesthe affected parties
►Tax impacts the profitability Tax impacts the profitability of any product, the degree may of any product, the degree may varyvary
►Whoever pays the tax suffers Whoever pays the tax suffers the tax burdenthe tax burden
Tax incidence: PED similar to PES
Price
Quantity
D
S
P1
Qe
S + tax
Ptax
Tax Revenue
Tax burden of consumer
Qtax
Pe Tax burden of producer
PED similar to PESPED similar to PES►Consumers and producers share Consumers and producers share the burden of tax equallythe burden of tax equally
►Consumers pay more and receive Consumers pay more and receive less outputless output
►Consumer and producer surplus Consumer and producer surplus decreaseddecreased
►Market size was reduced from Market size was reduced from Qe to QtaxQe to Qtax
Tax incidence: PED > PES
Price
Quantity
D
S
P1
Qe
S + tax
Ptax
Tax Revenue
Tax burden of consumer
Qtax
PeTax burden of
producer
PED > PESPED > PES►Demand is more elastic than supplyDemand is more elastic than supply►Consumers are more responsive to price, Consumers are more responsive to price, and therefore less tolerant of price and therefore less tolerant of price increasesincreases
►Producers pay more of the burden of the Producers pay more of the burden of the taxtax
►Government receives less revenueGovernment receives less revenue►Market size decreases quite Market size decreases quite significantly, therefore employment is significantly, therefore employment is more likely to declinemore likely to decline
►Deadweight loss is greater due to large Deadweight loss is greater due to large decrease in quantitydecrease in quantity
Tax incidence: PED < PES
Price
Quantity
D
S
P1
Qe
S + tax
Ptax
Tax RevenueTax burden of
consumer
Qtax
Peproducer
PED < PESPED < PES►Consumers are relatively Consumers are relatively indifferent to price changesindifferent to price changes
►Consumers tax burden is greater Consumers tax burden is greater than producersthan producers
►Government receives more revenueGovernment receives more revenue►Market size decreases relatively Market size decreases relatively little, therefore employment is little, therefore employment is less affectedless affected
►Deadweight loss is smallerDeadweight loss is smaller
PED vs PES SummaryPED vs PES Summary►The more elastic the demand The more elastic the demand relative to supply, the greater relative to supply, the greater the burden paid by producers, the the burden paid by producers, the greater the deadweight loss, and greater the deadweight loss, and the smaller the government revenuethe smaller the government revenue
►The more inelastic the demand The more inelastic the demand relative to supply, the greater relative to supply, the greater the burden paid by consumers, the the burden paid by consumers, the smaller the deadweight loss, and smaller the deadweight loss, and the greater the government revenuethe greater the government revenue
►Government will place indirect Government will place indirect taxes on products that have taxes on products that have relatively inelastic demandrelatively inelastic demand
The demand will change in The demand will change in smaller proportion, gain high smaller proportion, gain high revenue and yet not cause a revenue and yet not cause a large fall in employmentlarge fall in employment
Size of Deadweight LossSize of Deadweight Loss
► The deadweight loss of the tax will depend The deadweight loss of the tax will depend upon two factors:upon two factors: The size of the taxThe size of the tax The reduction in the quantity soldThe reduction in the quantity sold
► The reduction in the quantity sold will The reduction in the quantity sold will depend upon the elasticity of demand and depend upon the elasticity of demand and supply supply The more elastic demand or supply is the larger The more elastic demand or supply is the larger the deadweight loss will bethe deadweight loss will be
If either demand or supply is price inelastic If either demand or supply is price inelastic then the deadweight loss will be small and could then the deadweight loss will be small and could be zero if perfectly inelastic (no change in the be zero if perfectly inelastic (no change in the quantity sold and consumed)quantity sold and consumed)
Total Welfare before Tax
A
F
B
D
C
E
QTY0
Price
D = MB
S = MC
= PB
Q2
= PS
Pricebuyers
pay
Pricesellers
receive
= P1
Q1
Pricewithout tax
A + B + C = Consumer Surplus(before tax)
Producer Surplus = D + E + F(before tax)
E1
E1 maximizes Total Welfare
Tax Affect on Total Welfare
A
F
B
D
C
E
Quantity0
Price
D = MB
S = MC
= PB
Q2
= PS
Pricebuyers
pay
Pricesellers
receive
= P1
Q1
Pricewithout tax
Area C + E is a complete loss toSociety: (DEADWEIGHT LOSS)
B + D= Tax Revenue
Tax incidence and Tax incidence and Linear FunctionLinear Function
Tax incidence and Tax incidence and Linear FunctionLinear Function
HL Page 107 ExerciseHL Page 107 Exercise
Additional graphsAdditional graphsAdditional graphsAdditional graphs
Consumer Surplus
Price
Quantity
D
Po
Qo
Maximum Willingness to Pay for Qo
What is paid
Consumer Surplus
Original Consumer Surplus
Change in Consumer Surplus: Price Increase
Quantity
New Consumer Surplus
Loss in Surplus: Consumers paying more
Loss in Surplus: Consumers buying less
Price
D
Po
Qo
P1
Q1
Minimum Amount Needed to Supply Qo
Producer Surplus
Price
Quantity
Po
Qo
What is paid
Producer Surplus
S
Consumer and Producer Surplus
Price
Quantity
Po
Qo
S
Producer Surplus
Consumer Surplus
D
Loss in Efficiency Too High of Price (Price Floor)
Price
Quantity
Po
Qo
S
D
QL
New Consumer Surplus
PH
New Producer Surplus
Lost Consumer Surplus
Lost Producer Surplus
Deadweight Loss
New Producer Surplus
New Consumer Surplus
Loss in Efficiency Too Low of Price (Price Ceiling)
Price
Quantity
Po
Qo
S
D
QL
PL
Lost Consumer Surplus
Lost Producer Surplus
Deadweight Loss
New Producer Surplus
Tax Revenues
New Consumer Surplus
Loss in Efficiency Taxation
Price
Quantity
Po
Qo
S
D
QL
PS
Lost Producer Surplus
PD
STax
Lost Consumer Surplus Deadweight Loss
Tax
SubsidySubsidySubsidySubsidy
Loss in Efficiency Subsidy
Po
Qo
S
D
QH
PD
Subsidy Cost
PS SSubSubsidy
New Producer Surplus
Gain in Producer Surplus
New Consumer Surplus
Gain in Consumer Surplus
Price
Quantity
Deadweight Loss