Microeconomics Corso E John Hey

Part 4:INEFFICIENCIES IN MARKETS 27: Taxation 28: Monopoly and Monopsony 30: Game Theory 31: Duopoly (32: Externalities 33: Public Goods 34: Asymmetrical Information)

Chapter 27 Taxation We consider today the situation when the governo imposes a tax on a good. There are different types: flat rate; value added tax (IVA); Mrs Thatcher’s infamous poll tax; ecc.

Chapter 27 The most important thing in the chapter: With a tax, there are TWO prices for the good –...the price paid by the buyers,..the price recieved by the sellers.

Taxation Who pays the tax? The buyers? The sellers?... depends upon the demand and supply. The effect on the surplus? There is a deadweight loss caused by the tax.

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers 105 price received by the sellers 95

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers price received by the sellers 10095

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers 105 price received by the sellers 95

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers price received by the sellers 10495

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers 105 price received by the sellers 95

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers price received by the sellers 9695

The effect on supply price received by the sellers supplyprice paid by the buyers

price paid by the buyers price received by the sellers supplyprice paid by the buyers

price received by the sellers price paid by the buyers demandprice received by the sellers

price received by the sellers price paid by the buyers demandPrice received by the sellers

Who pays the tax? Without the tax With a tax equal to 10 price paid by the buyers 5560 price received by the sellers 5550

Chapter 27 The existence of a tax implies two prices: the price paid by the buyers and the price received by the sellers. As a function of the price paid by the buyers a tax does not cause any change in the demand curve but an upward shift of the supply curve by the amount of the tax. As a function of the price received by the sellers a tax does not cause any change in the supply curve but a downward shift in the demand curve by the amount of the tax. In the new equilibrium the difference between the price paid by the buyers and the price received by the sellers is equal to the tax. The burden of the tax depends upon the shapes of the demand and supply curves. The tax causes a deadweight loss of surplus – that no-one receives.

Chapter 27 Goodbye!