yELLOWSUBMARINER.COM - 1.3 Big Ideas · 2019. 2. 14. · Score yourself out of 10 5 Questions: Answers 1.3 Big Ideas webnote 130 26 Created Date: 2/14/2019 12:13:55 PM

1.3BigIdeas

1.3BigIdeaswebnote130 1

SyllabusItems:26-33SeeWebnote507forreadingscheduleItems:HLonly27,29,31+33

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1.3KeyTerms•  1.3-GovernmentIntervention1.  advaloremtax2.  directtax3.  Disequilibrium4.  flatratetax5.  glut(duetopricecontrol)6.  incidenceofatax(note

impactofelasticity)7.  indirecttax8.  priceceiling(maximumprice)9.  pricecontrol10.  pricefloor(minimumprice)


11. Subsidy12. rentcontrol13. parallel/black/

informalmarket14. minimumwagePhrasesfromsyllabus:welfareimpactofindirecttaxespricesupportforagriculturalproductsshortageduetopricecontrolsurplusduetopricecontrol

Query

•  Whatisthedifferencebetweenpricecontrolinterventionandindirecttax/subsidyinterventionintermsoftheoutcomeinthemarket?


TaxBurden(specifictax)


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132

price

quantity

0

d S+tax

S(supply)e2

e0A

B

Atq2Consumerburden=p2e2xp1

p2

p1p

x

sAtq2Producerburden=p1xsp

Governmentrevenue=p2e2sp

NB:Taxburdenisinfluencedstrongybyelasticity.IfPed=zeroatq0thenwhatwouldbetheareaofgovernmentrevenue?

BigIdea

1Taxburdenisessentialinordertoanalysehowstakeholdersareaffectedbyindirecttaxes

p0

q0q2

Atq0Consumerburden=p0ke0p1

k

TaxBurden(‘advalorem’tax)


SeeWebnote

132

price

quantity

0

d S+tax

S(supply)e2

e0

A

B

(Consumerburden=p2e2xp1)

p2

p1

p

x

s

(Producerburden=p1xsp)

(Governmentrevenue=p2e2sp)

NB:Taxburdenisinfluencedstrongybyelasticity.IfPed=zeroatq0thenwhatwouldbetheareaofgovernmentrevenue?

BigIdea

1Taxburdenisessentialinordertoanalysehowstakeholdersareaffectedbyindirecttaxes.TaxburdenissignificantlyaffectedbyPeD(priceelasticityofdemand).

p0

q0q2

AdValoremTax:amountoftaxpaidatq2(pp2e2s)isNOTthesameasatq0(p1p0keo)

k

TaxBurdenPed=0


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132

price

quantity

0

d S+tax

S(supply)e2

e0A

B

Consumerburden=p0zeop1

p2

p1

p

x

sProducerburden=zero


Ped=Zero

p0

q0q2

Atq0whenPED=0thengovernmentrevenue=p0zeop1

z

Atq0consumerburdenisalso=p0ze0p1

TaxburdenissignificantlyaffectedbyPeD(priceelasticityofdemand)

TaxBurden


SeeWebnote

132

price

quantity

0

d S+tax

S(supply)e2

e0A

B


p2

p1p

x



Ped=Zero

p0

q0q2

WhenPED=0thengovernmentrevenue=p0zeop1

z

TaxBurden


SeeWebnote

132

price

quantity

0

d S+tax

S(supply)e2

e0A

B


p2

p1p

x



Ped=Zero

p0

q0q2

WhenPED>0thengovernmentrevenue=p0zeop1

z

Elasticityaffectstaxburden


Inelastic Elastic

IndirectTax-goodorbad?

1.3BigIdeaswebnote130

DeadweightLoss=costtosocietyduetoreductioninmarketsizetoQ1asaresultofsomeintervention(indirecttaxationinthisinstance).Notethatthe‘burdenofthetax’issharedbytheconsumerandtheproducerinthediagramsshowninslides5-7.

10

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132BigIdea

2

Indirecttaxrevenue:taxburden

TaxburdenGoodorbad?1)  Goodfor

governmentandrevenuegivesfundsformeritandpublicspending

2)  …..ButmarketsgetsmallerasresourceallocationfallstoQt.Thiscanbebadfornormalgoodsbutgoodifthegoodisademeritgoode.g.cigarettes

DeadweightLoss


falls

falls

Supply+tax

SeeWebnote

132and

‘deadweight

loss’in138

CS

PS

Indirecttax-whopays?


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132

Deadweightloss

Consumerpays

Producerpays

DeadweightlossForconsumer

DeadweightlossForproducer

Subsidy–2questions


S1

Eo

0 Q

P S2

q1

p1

q2

p2 Es

D

q3

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132

Whatistherealcostofasubsidy?

Whopaysforth

e

subsidy?

p3

BigIdea

3 Beabletoshowwhotakestheburdenofasubsidy

Inyouranalysisbesuretonotethattheanalysiscommencesataspecificpoint.InthiscasetheanalysiscommencesatEoandq1.thesubsidyshiftsproductiontoq2andthecostofthesubsidyisEsap3p2

a

Subsidy–knowthecostofasubsidy


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132


Whopaysforth

e

subsidy?

BigIdea

3 Beabletoshowwhotakestheburdenofasubsidy

Toshowthecostofthesubsidy.Thegovernmentwillneedtopaythefirm:Pp-e-f-PcThiscostmustbepaidbythetaxpayer.Thetrianglerepresentsawelfarelossordeadweightloss.ForthistriangleMC>MB.Societyloses.

Source:Trakakesp.86.

e

f



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132

Toshowthecostofthesubsidyreferto:

PpcbPc


c

b

Winner:Firmiskeystakeholderwinner:Notethatfirmreceicesadditionalrevenueof

PpcbPcLoser:Whatisproblemwiththesubsidy?SocietyisworseoffasforeachoftheextraunitsproducedtheMC>MBshownbyarea‘a’



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132

Toshowthecostofthesubsidyreferto:

PpcbPc


c

b

Winner:Firmiskeystakeholderwinner:Notethatfirmreceicesadditionalrevenueof

PpcbPc

Canyouanalyse?

1.  Costpaidbygovernmentis

p3aEsp2


Whopaysforthesubsidy?


1.  Ultimatelyitispaidbysocietyintermsofhighertaxes

2.  Canyoushowrealcostonthediagrami.e.productionofq2shouldrequireapriceofopposite

p3

PriceControlisthemost‘interventionist’typeofinterferenceandleadsto‘disequilibrium’


SeeWebnote

131+‘black

markets’in

Webnote

137.

BigIdea

4

Intervention+BlackMarkets


Seewebnote

137fordetails

PriceControl(BufferStockScheme)


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131+‘black

markets’in

Webnote

137.

1.3BigIdeaswebnote130

Note‘Intervention’isakeystakeholdertopicinthecourseandonethroughwhichtheycantestyourabilitytoanalyse+evaluatetheimpactonstakeholders(winnersandlosersinamarketsituation).

21

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132BigIdea

5

Supply+indirecttax


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1

2

3

4

‘Intervention’:4stakeholdersaffected

1=consumer2=government3=producer4=society/lessoutputisproduced

Supply+indirecttax

Useofindirecttaxationbygovernment:stateclearlywhethertheobjectiveofgovernmentinapplyingthetax.Isit1)or2)?Thereare2keyreasonsfor

usingindirecttaxes.

1)revenue2)consumption

1.   Revenue:Primaryobjectiveofgovernmentindirecttaxationistoraisetaxrevenueforthegovernmenttopayforexpenditurese.g.meritandpublicgoods.Inelasticgoodswillraisemorerevenueandtherewillbelessimpactonconsumptionandmarketsizewillnotbesignificantlyaffected.Considerheretheuseofthesetaxesfor‘demeritgoods’e.g.smoking.Notehoweverthatallfinalgoodsandserviceshaveanindirecttaxandthereforecontributetogovernmentrevenue

2.   Consumption:Insomemarketsgovernmentwillwanttoreduceconsumptionorseeleesdamageintaxingcertaingoodse.g.luxurygoods.Elasticgoodswillraiserevenuebutconsumptionwillfallsignificantlyandthemarketsizewillbeaffected.Examplesherewouldbeluxurygoodswhereconsumerswouldbepricesensitiveduetohigh%ofincomespentonthegood.

3.   Notethatindirecttaxes(e.g.VAT)arecollectedonALLfinalgoodsandservicesintheeconomy.Onasmallnumberofgoodsalowerrateappliese.g.children’sclothing.Somegoodshaveadditional‘excisetaxes’appliedsuchastobaccoandcarfuelathigherratesofadvaloremtaxdesignedtodiscourageconsumption


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Useofsubsidiesbygovernment:Thereare2keyreasonsforusingasubsidy.

1)biggermarket/moreoutput2)lowerpricesforconsumers

1.   Increasedoutput/largermarket:Primaryobjectiveofgovernmentsubsidyistoincreasethesizeofamarketbasedongovernmentpolicye.g.thegovernmentwantstomoveawayfromfossilfuelsandwantstopromotecleanenergy.

2.   Consumption/lowerprices:Insomemarketsgovernmentwillwanttoincreaseconsumptioninakeyindustrye.g.cleanenergysuchaswindorsolarenergy.Thisincreasedconsumptionisbroughtaboutbythelowerpricesinthemarket

3.   Notethatsubsidiesareexpensiveandthecostispaidbygovernment.Asubsidyrepresentsinterventionandthetaxpayermustpaythecost.Itisalsoasignificantinterventionintheallocationofresourcesandsubsidieshaveanopportunitycostintermsofgovernementspendinginotherareasoftheeconomye.e.meritandpublicgoods,transferpayments 1.3BigIdeaswebnote130 24

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HL3


Qd Price$ Qs

3000 7 9000

4000 6 8000

5000 5 7000

6000 4 6000

7000 3 5000

8000 2 4000

9000 1 3000

Thetablebelowshowsthedemand(Qd)andsupply(Qs)schedulesforShoes.

1.  identifytheequilibriumpriceoftheshoes(1mark)

2.  whatistheamountofexcesssupplyat5$(1mark)

3.  Assumethatthgovernmentimposesaspecifictaxof2$perunitontheshoes.Whatisthenewequilibriumprice?(2mark)

4.  Calculatethetotaltaxrevenuepayabletogovernment(2mark)

5.  Outlinehowmuchofthetaxincidenceincidence(burden)ispaidbytheconsumer(2mark)

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yELLOWSUBMARINER.COM - 1.3 Big Ideas · 2019. 2. 14. · Score yourself out of 10 5 Questions: Answers 1.3 Big Ideas webnote 130 26 Created Date: 2/14/2019 12:13:55 PM