If the Average Price of a New One Family Home Is 243500 Ti84
Topic four Part 2: Applications of Supply and Demand
4.7 Taxes and Subsidies
Learning Objectives
By the end of this department, y'all will be able to:
- Distinguish between legal and economic revenue enhancement incidence
- Know how to represent taxes by shifting the bend and the wedge method
- Understand the quantity and price impact from a tax
- Describe why both taxes and subsidies crusade deadweight loss
Taxes are not the most popular policy, but they are often necessary. We will look at two methods to understand how taxes affect the marketplace: by shifting the curve and using the wedge method. Starting time, we must examine the difference between legal tax incidence and economic taxation incidence.
Legal versus Economic Tax Incidence
When the authorities sets a tax, information technology must decide whether to levy the tax on the producers or the consumers. This is chosenlegal tax incidence. The most well-known taxes are ones levied on the consumer, such every bit Government Sales Tax (GST) and Provincial Sales Revenue enhancement (PST). The authorities also sets taxes on producers, such every bit the gas tax, which cuts into their profits. The legal incidence of the tax is actually irrelevant when determining who is impacted past the tax. When the government levies a gas tax, the producers volition pass some of these costs on as an increased price. Likewise, a taxation on consumers will ultimately decrease quantity demanded and reduce producer surplus. This is because the economical tax incidence, or who actually pays in the new equilibrium for the incidence of the tax, is based on how the market responds to the price change – non on legal incidence.
Tax – Shifting the Curve
In Topic 3, nosotros determined that the supply curve was derived from a house's Marginal Cost and that shifts in the supply bend were caused past any changes in the market place that caused an increase in MC at every quantity level. This is no different for a revenue enhancement. From the producer's perspective, any tax levied on them is but an increase in the marginal costs per unit. To illustrate the outcome of a tax, let's look at the oil market once again.
If the regime levies a $3 gas tax on producers (a legal revenue enhancement incidence on producers), the supply curve will shift up past $3. As shown in Figure 4.8a below, a new equilibrium is created at P=$v and Q=2 meg barrels. Note that producers exercise not receive $5, they now only receive $2, equally $iii has to be sent to the government. From the consumer's perspective, this $i increase in cost is no different than a price increment for any other reason, and responds by decreasing the quantity demanded for the higher priced expert.
What if the legal incidence of the tax is levied on the consumers? Since the demand curve represents the consumers' willingness to pay, the demand bend will shift down as a result of the tax. If consumers are but willing to pay $4/gallon for 4 million gallons of oil only know they volition confront a $3/gallon revenue enhancement at the till, they will only buy 4 million gallons if the ticket price is $1. This creates a new equilibrium where consumers pay a $2 ticket cost, knowing they will have to pay a $3 taxation for a full of $5. The producers will receive the $2 paid earlier taxes.
Annotation that whether the tax is levied on the consumer or producer, the concluding event is the aforementioned, proving the legal incidence of the taxation is irrelevant.
Taxation – The Wedge Method
Another method to view taxes is through the wedge method. This method recognizes that who pays the tax is ultimately irrelevant. Instead, the wedge method illustrates that a tax drives a wedge between the price consumers pay and the acquirement producers receive, equal to the size of the tax levied.
Equally illustrated below, to detect the new equilibrium, one simply needs to find a $three wedge between the curves. The first wedge tested is only $0.vii, followed past $i.5, until the $3.0 tax is found.
Market Surplus
Like with cost and quantity controls, one must compare the market surplus before and after a cost modify to fully understand the effects of a tax policy on surplus.
Before
The market place surplus before the tax has not been shown, as the process should be routine. Ensure yous understand how to get the following values:
Consumer Surplus= $iv million
Producer Surplus = $8 1000000
Market place Surplus = $12 million
After
The market surplus later on the policy can be calculated in reference to Effigy four.7d
Consumer Surplus (Blue Area) = $1 million
Producer Surplus (Ruby-red Area)= $ii million
Authorities Revenue (Green Area) = $6 million
Market Surplus= $nine one thousand thousand
Why is Authorities Included in Market place Surplus
In our previous examples dealing with market surplus, we did not include any give-and-take of government revenue, since the government was not engaging in our marketplace. Remember that market surplus is our metric for efficiency. If government was not included in this metric, information technology would non be very useful. In this case a million-dollar loss to authorities would be considered efficient if it resulted in a $1 proceeds to a consumer. To ensure that our metric for efficiency is notwithstanding useful nosotros must consider government when calculating market surplus.
As with the quota – both consumer and producer surplus decreased because of a reduced quantity. The difference is, since the toll is changing, there is redistribution. This fourth dimension, the redistribution is from consumers and producers to the regime. Think, only a alter in quantity causes a deadweight loss. Cost changes but shift surplus around between consumers, producers, and the government.
Transfer and Deadweight Loss
Allow's look closely at the tax's impact on quantity and price to see how these components affect the marketplace.
Transfer – The Impact of Price
Due to the tax's result on toll, areas A and C are transferred from consumer and producer surplus to government acquirement.
Consumers to Government – Area A
Consumers originally paid $4/gallon for gas. Now, they are paying $5/gallon. The $1 increase in price is the portion of the tax that consumers take to bear. Despite the fact that the tax is levied on producers, the consumers take to deport a share of the toll change. The size of this share depends on relative elasticity – a concept nosotros volition explore in the side by side section. This is because a decrease in price to producers means quantity supplied is falling, and in social club to maintain equilibrium, quantity demanded must fall by an equal amount. This price change means the government collects $1 x ii million gallons or $ii million in tax revenue from the consumers. This is a straight transfer from consumers to government and has no effect on market place surplus.
Producers to Government – Area C
Originally, producers received revenue of $4/gallon for gas. At present, they receive $2/gallon. This $two decrease is the portion of the taxation that producers have to conduct. This means that the government collects $2 ten ii million gallons or $iv million in revenue enhancement revenue from the producers. This is a transfer from producers to the government.
As calculated, the government receives a total of $6 million in tax revenue, which is taken from consumers and producers. This has no impact on internet market surplus.
Deadweight Loss – The Impact of Quantity
If we just considered a transfer of surplus, at that place would be no deadweight loss. In this example, though, we know that price changes come with a alter in quantity. A college cost for consumers will cause a decrease in the quantity demanded, and a lower price for producers will crusade a decrease in quantity supplied. This reduction from equilibrium quantity is what causes a deadweight loss in the market since there are consumers and producers who are no longer able to buy and supply the skillful.
Consumer Surplus Decrease – Area B
Due to the increase in cost, many consumers will switch away from oil to culling options. This decrease in quantity demand of 1.five million gallons of oil causes a deadweight loss of $1 million.
Producer Surplus Decrease – Expanse D
Producers, who now receive simply $2.00/gallon for their production, will as well decrease quantity supplied by i.5 one thousand thousand gallons of oil. It is no coincidence that the size of the decrease is the same. When you create the wedge between consumers and producers, you lot are finding the quantity where the total amount of the taxation is incurred just the market is nonetheless at equilibrium. Remember that quantity demanded must equal quantity supplied or the market will not exist stable. This mirrored decrease in quantity ensures this is even so the case. Notice, however, that the touch of this quantity drop causes a larger decrease in producer surplus than consumer surplus totalling $2 million. Once again, this is due to elasticity, or the relative responsiveness to the price chance, which will be explored in more detail presently.
Together, these decreases cause a $3 million deadweight loss (the difference between the market place surplus before and market surplus subsequently).
Subsidy
While a tax drives a wedge that increases the cost consumers have to pay and decreases the price producers receive, a subsidy does the contrary. Asubsidy is a do good given by the authorities to groups or individuals, usually in the form of a cash payment or a tax reduction. A subsidy is often given to remove some type of brunt, and information technology is oftentimes considered to be in the overall interest of the public. In economic terms, a subsidy drives a wedge, decreasing the cost consumers pay and increasing the price producers receive, with the government incurring an expense.
In Topic 3, we looked at a case study of Victoria's competitive housing market where high demand drove up prices. In response, the government has enacted many policies to allow low-income families to however become homeowners. Let'southward look at the effects of ane possible policy. (Note the post-obit policy is unrealistic but allows for piece of cake comprehension of the effect of subsidies).
In the market above, our efficient equilibrium begins at a cost of $400,000 per home, with twoscore,000 homes beingness purchased. The government wants to substantially increment the number of consumers able to purchase homes, so it bug a $300,000 subsidy for any consumers purchasing a new dwelling. This drives a wedge between what home buyers pay ($250,000) and what home builders receive ($550,000).
With all regime policies we have examined so far, we have wanted to determine whether the issue of the policy increases or decreases marketplace surplus. With a subsidy, nosotros desire to do the same analysis. Unfortunately, considering increases in surplus overlap on our diagram, it becomes more complicated. To simplify the analysis, the following diagram separates the changes to producers, consumers, and authorities onto unlike graphs.
Producers
The producers now receive $550,000 instead of $400,000, increasing quantity supplied to 60,000 homes. This increases producer surplus byareas A and B.
Consumers
The consumers now pay $250,000 instead of $400,000, increasing quantity demanded to sixty,000 homes. This increases consumer surplus byareas C and D.
Regime
The government now has to pay $300,000 per habitation to subsidize the 60,000 consumers ownership new homes (this policy would cost the government $18 billion!!) Graphically, this is equal to a decrease in authorities to areas A, B, C, D and E.
Result
Our total gains from the policy (to producers and consumers) are areasA, B, C and D,whereas full losses (the cost to the government) are areasA, B, C, D, and Due east.To summarize:
AreasA, B, C and D are transferred from the government to consumers and producers.
Area E is a deadweight loss from the policy.
There are 2 things to notice near this case. Offset, the policy was successful at increasing quantity from 40,000 homes to 60,000 homes. 2nd, it resulted in a deadweight loss because equilibrium quantity was too high. Remember,someday quantity is inverse from the equilibrium quantity, in the absence of externalities, in that location is a deadweight loss. This is true for when quantity is decreased and when it is increased.
http://www.investopedia.com/terms/south/subsidy.asp
Summary
Taxes and subsidies are more complicated than a price or quantity command every bit they involve a third economic player: the government. As nosotros saw, who the taxation or subsidy is levied on is irrelevant when looking at how the market ends up. Note that the last three sections have painted a fairly grim movie about policy instruments. This is considering our model currently does non include the external costs economic players impose to the macro-environment (pollution, affliction, etc.) or aspect whatever meaning to equity. These concepts will be explored in more particular in later topics.
In our examples to a higher place, we see that the legal incidence of the tax does non thing, simply what does? To determine which party bears more of the burden, nosotros must apply the concept of relative elasticity to our assay.
Glossary
- Economical Tax Incidence
- the distribution of tax based on who bears the brunt in the new equilibrium, based on elasticity
- Legal Tax Incidence
- the legal distribution of who pays the tax
- Subsidy
- a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction It is frequently to remove some type of burden, and information technology is often considered to be in the overall interest of the public
Exercises 4.vii
Refer to the supply and need curves illustrated below for the post-obit THREE questions. Consider the introduction of a $20 per unit tax in this market place.
1. Which areas represent the loss to consumer AND producer surplus as a result of this tax?
a) chiliad + f.
b) j + k.
c) k + j.
d) k + f + j + g.
ii.Which areas represent the proceeds in government revenue as a result of this tax?
a) k + f.
b) j + g.
c) m + j.
d) one thousand + f + j + g.
iii. Which areas represent the deadweight loss associated with this tax?
a) f + g.
b) one thousand – thousand.
c) j – f.
d) k + f + j + m.
4. Assume that the marginal cost of producing socks is constant for all sock producers, and is equal to $5 per pair. If government introduces a constant per-unit tax on socks, and then which of the post-obit statements is Faux, given the after-tax equilibrium in the sock market? (Assume a downward-sloping demand curve for socks.)
a) Consumers are worse off every bit a outcome of the revenue enhancement.
b) Spending on socks may either increase or decrease as a result of the tax.
c) Producers are worse off as a result of the taxation.
d) This taxation will event in a deadweight loss.
5. Refer to the supply and demand diagram beneath.
If an subsidy of $3 per unit is introduced in this market, the price that consumers pay will equal ____ and the toll that producers receive internet of the subsidy will equal _____.
a) $2; $5.
b) $three; $half dozen.
c) $iv; $vii.
d) $5; $8.
6. If a subsidy is introduced in a market, then which of the post-obit statement is Truthful? Assume no externalities
a) Consumer and producer surplus increase merely social surplus decreases.
b) Consumer and producer surplus decrease but social surplus increases.
c) Consumer surplus, producer surplus, and social surplus all increase.
d) Consumer surplus, producer surplus, and social surplus all decrease
Use the diagram below to answer the post-obit Two questions.
7. If a $6 per unit tax is introduced in this marketplace, then the toll that consumers pay will equal ____ and the price that producers receive cyberspace of the tax volition equal _____.
a) $10; $4.
b) $ix; $3.
c) $8; $2.
d) $vii; $1.
8. If a $6 per unit tax is introduced in this marketplace, then the new equilibrium quantity will be:
a) 20 units.
b) twoscore units.
c) lx units.
d) None of the above.
nine. Which of the following statements near the deadweight loss of taxation is TRUE? (Assume no externalities.)
a) If there is a deadweight loss, then the acquirement raised past the taxation is greater than the losses to consumer and producers.
b) If there is no deadweight loss, then revenue raised by the government is exactly equal to the losses to consumers and producers.
c) Both a) and b).
d) Neither a) nor b).
10. Which of the post-obit correctly describes the equilibrium effects of a per-unit of measurement tax, in a market with NO externalities?
a) Consumer and producer surplus increment but social surplus decreases.
b) Consumer and producer surplus decrease only social surplus increases.
c) Consumer surplus, producer surplus, and social surplus all increase.
d) Consumer surplus, producer surplus, and social surplus all subtract.
11. Which of the following correctly describes the equilibrium furnishings of a per unit of measurement subsidy?
a) Consumer cost rises, producer toll falls, and quantity increases.
b) Consumer price falls, producer price falls, and quantity increases.
c) Consumer toll rises, producer toll rises, and quantity increases.
d) Consumer cost falls, producer cost rises, and quantity increases.
12. Refer to the supply and demand diagram below.
If an output (excise) revenue enhancement of $5 per unit is introduced in this market, the price that consumers pay will equal ____ and the price that producers receive internet of the taxation will equal _____.
a) $five; $10.
b) $half dozen; $xi.
c) $seven; $12.
d) $8; $iii.
13. Consider the supply and demand diagram beneath.
If a $2 per unit of measurement subsidy is introduced, what will be the equilibrium quantity?
a) 40 units.
b) 45 units.
c) 50 units.
d) 55 units.
Consider the supply and demand diagram below. Presume that: (i) there are no externalities; and (two) in the absence of government regulation the market supply curve is the one labeled S1.
14. If a $5 per unit taxation is introduced in this market place, which surface area represents the deadweight loss?
a) a.
b) a + b.
c) b + c.
d) a + b + c.
Source: https://pressbooks.bccampus.ca/uvicecon103/chapter/4-6-taxes/
0 Response to "If the Average Price of a New One Family Home Is 243500 Ti84"
Post a Comment