Chapter 7, Taxation and government intervention. After reading this chapter, you should be able to: Show how equilibrium maximizes producer and consumer surplus, demonstrate the burden of taxation to consumers and producers, explain how government intervention is a type of implicit taxation, define rent seeking and show how it is related to elasticity. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Show how equilibrium maximizes consumer and producer surplus Define rent seeking and show how it is related to elasticity Explain how government intervention is a type of implicit taxation Demonstrate the burden of taxation to consumers and producers 2 Producer and Consumer Surplus Consumer surplus is the value the consumer gets from buying a product, less its price It is the area above the supply curve but below the price the producer receives Producer surplus is the price the producer sells a product for less the cost of producing it It is the area below the demand curve and above the price 3 The Burden of Taxation The costs of taxation include: The administrative costs of compliance, which are the resources used by the government to administer the tax and individuals and businesses to comply with it The deadweight loss, which is the loss of consumer and producer surplus that is not gained by the government Direct cost of the tax paid to the government by consumers and producers 4 The Burden of Taxation Who bears the burden of a tax? If demand is more inelastic than supply, consumers will pay the higher share If supply is more inelastic than demand, suppliers will pay the higher share The more inelastic one’s relative demand and supply, the larger the tax burden one will bear The person who physically pays the tax is not necessarily the person who bears the burden of the tax 5 What Goods Should Be Taxed? Goal of Government Most effective when Raise revenue, limit deadweight loss Demand or supply is inelastic Change behavior Demand or supply is elastic Elasticity Who bears the burden? Demand inelastic and supply elastic Consumers Supply inelastic and demand elastic Producers Both supply and demand elastic Shared, but the group whose S or D is more inelastic pays more 6 The Burden of Taxation Fraction of tax borne by demander Fraction of tax borne by supplier | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Show how equilibrium maximizes consumer and producer surplus Define rent seeking and show how it is related to elasticity Explain how government intervention is a type of implicit taxation Demonstrate the burden of taxation to consumers and producers 2 Producer and Consumer Surplus Consumer surplus is the value the consumer gets from buying a product, less its price It is the area above the supply curve but below the price the producer receives Producer surplus is the price the producer sells a product for less the cost of producing it It is the area below the demand curve and above the price 3 The Burden of Taxation The costs of taxation include: The administrative costs of compliance, which are the resources used by the government to administer the tax and individuals and businesses to comply with it The deadweight loss, which is the loss of consumer and producer surplus that .
