Micro Chapter 29 Presentation 1- Tax Incidence

Public Choice Theory Economic analysis of government decision making, politics and elections ***majority voting can lead to inefficiency and inconsistency

Tax Incidence The person or group that pays for the tax

Tax Incidence Efficiency Loss of a Tax Q P Price (Per Bottle) Quantity (Millions of Bottles Per Month) S D S’ Tax $2 Tax Paid by Consumers Tax Paid by Producers Efficiency Loss (or Deadweight Loss)

Tax Incidence 0 P QQ P 0 Tax Incidence and Elastic Demand- burden on the supplier Tax Incidence and Inelastic Demand- burden on the consumer Demand Elasticity and the Incidence of an Excise Tax DeDe DtDt Tax StSt S StSt S Q2Q2 P1P1 PePe PaPa P1P1 PiPi PbPb Q1Q1 Q2Q2 Q1Q1 a a b b c c

Tax Incidence 0 P QQ P 0 Tax Incidence and Elastic Supply- consumers pay Tax Incidence and Inelastic Supply- producers pay Supply Elasticity and the Incidence of an Excise Tax D D S SStSt StSt P1P1 PaPa PePe P1P1 PbPb PiPi Q1Q1 Q2Q2 Q1Q1 Q2Q2 Tax a a b b c c

Logrolling The trading of votes by legislators to secure favorable outcomes on decisions concerning the provisions of public and quasi-public goods (ie education, fire protection)

Paradox of Voting A situation where paired-choice voting by a majority rule fails to provide a consistent ranking of society’s preferences for public goods or services **may be skewed by the order of the vote- voter apathy

Median Voter Model Theory that under majority rule the middle voter will be in the dominant position to determine the outcome of an election Ex- extreme voters prefer middle option over the other extreme

Implications of the Median Voter Model 1. dissatisfied voters because they either favor more or less government intervention 2. people “vote with their feet”- move to locations with similar voters

Rent-Seeking Behavior The appeal to government at taxpayers’ or someone else’s expense EX- gov’t construction projects to union laborers Large subsidies to farmers High tariffs on imported goods

Government Failure Inefficiencies in resource allocation Caused by pressure from special interest groups, short-sighted political behavior, and bureaucratic inefficiency

Special Interest Effect Any result of government promotion of the interests of a small group at the expense of a much larger group Small number of people obtain a government policy/program that gives them large gains at the expense of a larger group

Pork Barrel Politics Securing government funds for local projects that benefit only a small amount of constituents while paid for by a large scattering of tax-payers Added to a non-related bill to obtain votes

Benefits Received Principle Those who benefit most from government- supplied goods or services should pay the taxes necessary to finance them EX- gasoline taxes used for highway repairs

Problems with Benefits Received 1. Very difficult to measure how much individuals benefit from public goods 2. Tax unemployed workers for unemployment benefits?

Ability-to-Pay Principle The tax burden should be apportioned according to the taxpayers’ income and wealth