Equilibrium is the price that is exchanged at cash register. The supply curve will shift down when there are taxes since prices increase everywhere. It is also important to note that taxes prevent mutually beneficial transactions from taking place. This, and this only, is why economists often refer to taxes as bad. Because, net gains of society could be greater without many taxes.
An example of how taxes are bad is that they make us waste time. Rizzo spent 15 hours last year working on organizing and preparing his taxes. As seen by the amount of time he spent, this took up a lot of time and effort that could have been better used to produce. We lose $400 billion a year because of time wasted in this fashion to prepare taxes. This is not a good use of time and this relates back to #8 from class a few days ago. Simply put, in a world where we get more production/benefits from taxing, this would be a social good. But must note that these types of things do no show up in the S + D curve.
Sales taxes refer to when companies pay taxes.
Notes on graph: Buyers are affected in the bubble gum market because the demand curve shifts down and thus they are less likely to buy because the taxation causes prices to increase. There is also a new equilibrium. The new equilibrium is simply where the lines cross. As a result of the taxation and new EQ, less gum is sold. Since Qr falls, you know society is not thriving like it could if there was no tax.
Whether or not the buyer or seller pays the tax, there is still an economic burden. This is because even though the government may intend to tax a certain party, no one can decide who reaps the burden of a tax. It is all an economic power/phenomenon that decides. Simply put, it is the relative elasticity of supply and demand that decides who pays the most of a tax.
Specifically, if the demand curve shifts down, buyers face the burden. If sellers curve is more vertical, sellers face the burden.
So this brings up the question: What should we tax? The best thing we could do is find markets with low elasticity where change in prices wont affect supply and demand drastically! For example, Jibbitz would not be a good thing to tax because it is a very elastic market. A small price increase could theoretically destroy the market. The market for water, however, is very inelastic because there are few substitutes and it is a requisite for life. Thus, if a tax was placed on water, it would not impact our consumer decision all that much.
Then, Prof. Rizzo concluded class by talking a little bit about subsidies. Comparative to taxation, subsidies have the same result. It doesn't matter who we subsidize because it all has to do with relative elasticity of supply and demand.
For example, take the ethanol market. Say the government was going to subsidize firms that sell ethanol. We'd all be better off. Here's why:
- Supply curve shifts out. Assume firms get 53 cents per unit of ethanol sold. So a firm can lower the price for consumers and still make more money. If example, if firm lowers price for ethanol from $3 to $2.90, they will increase sales and make more money because old price =$3, so now with tax, they will make $3.43. Plus buyers get to get ethanol at a cheaper price, so they very well could be more demand. In this world, both buyers and sellers are better off.
- Even though we are better off, the economy is worse off. Prof. Rizzo said he would go over exactly what he meant by this next class.
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