Market intervention: who really bears the burden of taxes in a competitive market sitution?

Transcription

1 Market intervention: who really bears the burden of taxes in a competitive market sitution? egin with the imposition of taxes on goods in a competitive market situation eg Value dded Tax eg oods and Sales Tax eg xcise tax Is NP deduction a tax? on employers? on employees? Later we will do similar analysis in a monopoly situation: different results. undamental questions: who bears the burden? Producers? onsumers? anyone else? Start with simple unit excise tax eg 20 cents per litre of water eg 6 per litre of whisky eg 1 per litre of beer.

2 efine Statutory (legal) incidence of tax : who is required by law to pay the tax efine the incidence of tax : as where the economic burden really falls. eg if all sellers of beer (or water) are required to pay excise tax of 1 per litre of beer (or water sold, then clearly, the statutory incidence of the tax falls on the sellers. ssume initially there is no tax and equilibrium is at, output Q 1 and price P 1 onsumer surplus = Producer surplus = 0 Total Surplus = + = S = P 1

3 Suppose that government now imposes a 1 per litre excise tax on beer The demand curve remains the same (cannot change: what people are prepared to pay for beer, with or without tax). So supply curve has to shift up from to by 1= =. quilibrium output falls to. ut price only rises by = 1 1

4 What happens to consumer surplus? To producer surplus? total surplus? onsumer surplus has shrunk from to : loss = : where has this gone? Not to producers. Producer surplus has shrunk from to. loss = - where has this gone? Not to consumers- who are actually paying more now.

5 Some of the losses by consumers and producers have gone to ovt. What is government s receipts in taxes? = output * unit tax = Q 2 * = *. = area () = area (part of the consumer loss) + (part of producer loss) f the unit tax what part is effectively paid by consumers? What part is effectively paid by producers?

6 So what is Total Surplus now? nd what is lost to other than consumers or producers or govt? New Total Surplus = onsumer surplus + ovt revenue + Producer surplus = + + =. What s happened to? It s gone from the economy: dead-weight loss.

7 = ead-weight Loss to the economy: the only real loss ecause overnment has forced a rise in the price of beer quilibrium output has declined from to ie (-) fewer beers consumed. ven though the price that consumers were willing to pay ( part of the demand curve) was higher than the supply cost (given by of the supply curve) i.e. the economy/society is being denied a net benefit in consumption.

8 ut what about the other losses to consumers and producers? Neoclassical theory says they are only being transferred internally in this case to the overnment overnment s expenditure supposedly benefits the people they are elected by: hence the surplus going to government, supposedly goes back to them in some form or another.

9 So who bears the overall burden of the unit tax? 1. consumers who are denied consumption because of the higher price (represented by?) 2. onsumers who still buy at the higher price: lost 3. Producers who still produce and pay the tax: lost. Which is higher? or? Who bears the bigger burden: consumers or producers? ow can you tell?

10 ll depends on whether is > or < i.e. depends on the shape of the slope and positions of the emand and Supply curves. s drawn currently it seems that is > i.e. the incidence seems to fall relatively more on the producers than consumers. ut note the economic incidence of the tax is not the same as the statutory incidence.

11 It does not matter whether you do the analysis with the supply curve moving up or the demand curve moving down Moving the supply curve up implies superficially that the suppliers are paying the tax ut the effects will be exactly the same if we assume that the buyers are being asked to pay the tax and we move the demand curve down.

12 Suppose it is the buyer who has to give the tax to government: Lower green line giving the new demand curve or consumers the demand curve () still gives the maximum that they would pay Therefore the tax has to be included in the price they pay Their effective demand curve (after tax) drops by 1 to accommodate the tax: Same loss of consumer surplus, the loss of producer surplus, and the dead-weight loss. R NMISTS, S NT MTTR W IS LLLY RQUIR T PY T TX. (or does it? 1 bonus point?). 2

13 Note 2: slight difference between unit tax and ad valorem or percentage tax If there is a say a 10% tax on producers t = 0.1* P Then new price P2 = (1.1*P) ence where the price is high, the dollar amount is also higher. ence the demand curves (or the supply curves) will diverge with the percentage tax Percentage tax 1 2 Lo L

14 Similarly for the supply curves Instead of shifting up by the same amount along the quantity axis- it shifts more where the price is higher. Percentage tax Lo L

15 To understand the relative sharing of tax burdens etween consumers, producers, and the economy as a whole, Need to understand for what kinds of goods would supply be perfectly elastic? or what kinds of goods would demand tend to be inelastic? or beer? If a government says that they are imposing taxes on beer and spirits because the consumption of these goods are not good for society and government would like to discourage their consumption, how would you test this claim? In tutorials you will also examine the interesting case of payroll taxes paid by employers. eg NP payments.

16 Tutorial: draw the demand curve to be more elastic (i.e. flatter) Look at the change in equilibrium output, price, consumer surplus, producer surplus, and dead-weight loss. What kind of goods? Who bears the larger share of the burden of the taxes? Why might the demand curve be flattish? onsumers are able to move away from the tax by consuming other things. i.e consumers can legally avoid the tax by moving away from the taxed good. [Tax evasion is illegally not paying the required tax].

17 Tutorial: raw the demand curve to be more Inelastic i.e. steeper nswer the same questions. What kind of goods? an consumers move away from this tax in this situation? Look at the relative burden now between consumers and producers.