Micro Chapter 29
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Transcript of Micro Chapter 29
![Page 1: Micro Chapter 29](https://reader035.fdocuments.net/reader035/viewer/2022062719/5681329d550346895d993bfc/html5/thumbnails/1.jpg)
Micro Chapter 29
Presentation 1- Tax Incidence
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Public Choice Theory
• Economic analysis of government decision making, politics and elections
• ***majority voting can lead to inefficiency and inconsistency
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Tax IncidenceEfficiency Loss of a Tax
0
2
4
6
8
10
12
14
5 10 15 20 25 Q
P
Pri
ce (
Per
Bo
ttle
)
Quantity(Millions of Bottles Per Month)
S
D
S’
Tax $2
Tax Paid byConsumers
Tax Paid byProducers
EfficiencyLoss (or
DeadweightLoss)
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Tax Incidence
0
P
P
0
Tax Incidence andElastic Demand- burden on the
supplier
Tax Incidence andInelastic Demand- burden on
the consumer
Demand Elasticity and the Incidenceof an Excise Tax
De
Dt
Tax TaxSt
S
St
S
Q2
P1
Pe
Pa
P1
Pi
Pb
Q1 Q2Q1
aa
b
b
cc
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Tax Incidence
0
P
P
0
Tax Incidence andElastic Supply- consumers pay
Tax Incidence andInelastic Supply- producers pay
Supply Elasticity and the Incidenceof an Excise Tax
D D
S
SSt
St
P1
Pa
Pe
P1
Pb
Pi
Q1Q2 Q1Q2
Tax Tax
aa
bb
c
c
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Logrolling
• The trading of votes by legislators to secure favorable outcomes on decisions concerning the provisions of public and quasi-public goods (ie education, fire protection)
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Paradox of Voting
• A situation where paired-choice voting by a majority rule fails to provide a consistent ranking of society’s preferences for public goods or services
• **may be skewed by the order of the vote- voter apathy
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Median Voter Model
• Theory that under majority rule the middle voter will be in the dominant position to determine the outcome of an election
• Ex- extreme voters prefer middle option over the other extreme
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Implications of the Median Voter Model
• 1. dissatisfied voters because they either favor more or less government intervention
• 2. people “vote with their feet”- move to locations with similar voters
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Rent-Seeking Behavior
• The appeal to government at taxpayers’ or someone else’s expense
• EX- gov’t construction projects to union laborers
• Large subsidies to farmers
• High tariffs on imported goods
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Government Failure
• Inefficiencies in resource allocation
• Caused by pressure from special interest groups, short-sighted political behavior, and bureaucratic inefficiency
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Special Interest Effect
• Any result of government promotion of the interests of a small group at the expense of a much larger group
• Small number of people obtain a government policy/program that gives them large gains at the expense of a larger group
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Pork Barrel Politics
• Securing government funds for local projects that benefit only a small amount of constituents while paid for by a large scattering of tax-payers
• Added to a non-related bill to obtain votes
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Benefits Received Principle
• Those who benefit most from government-supplied goods or services should pay the taxes necessary to finance them
• EX- gasoline taxes used for highway repairs
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Problems with Benefits Received
• 1. Very difficult to measure how much individuals benefit from public goods
• 2. Tax unemployed workers for unemployment benefits?
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Ability-to-Pay Principle
• The tax burden should be apportioned according to the taxpayers’ income and wealth