1 Applications of Supply & Demand Chapter 4. 2 Model this using a S & D diagram But an even bigger problem is the consumers themselves. That's because.
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Presentation on theme: "1 Applications of Supply & Demand Chapter 4. 2 Model this using a S & D diagram But an even bigger problem is the consumers themselves. That's because."— Presentation transcript:
2 Model this using a S & D diagram But an even bigger problem is the consumers themselves. That's because subsidies make energy practically free in Iran, discouraging any serious energy conservation. Gasoline, for example, costs about 40 cents a gallon at the pump. That's encouraged an explosion of use, as Iranians add new cars while continuing to use fuel-guzzling old models. It has also encouraged a brisk smuggling trade as Iranians buy millions of gallons of fuel at the subsidized price and truck them into neighboring Pakistan, Turkey, Afghanistan and Iraq for sale at market rates. Demand has now far outstripped the country's refinery capacity. The government has shelled out at least $7 billion on gasoline imports alone so far this fiscal year, which ends in March. Much of that money was drawn from the country's rainy-day oil surplus fund, which is supposed to be used only on capital projects or during periods when global oil prices are low.
4 Price Controls Floor Ceilings Who benefits from each: sellers or buyers?
Figure 1 A Market with a Price Ceiling (a) A Price Ceiling That Is Not Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium quantity $4 Price ceiling Equilibrium price Demand Supply 3 100
Price # of textbooks per year (in millions) 100110 $70 $80 $90 S The Impact of a Subsidy When a $20 per textbook subsidy is given to students, the demand for textbooks shifts vertically by the amount of the subsidy ($20). The market price for textbooks rises from $80 to $90. This is the new gross price for students. With the $20 subsidy, buyers now pay a new net price of $70 per text, $10 less than before. Text book buyers only get $10 of the benefits stemming from the subsidy; the supply side of the market enjoys the other $10 of the subsidy in the form of higher textbook prices. D 1 D2D2 (D 1 plus subsidy) $20 subsidy new gross price new net price P 2 = P 1 =
The average tax rate equals tax liability divided by taxable income. –A progressive tax is one in which the average tax rate rises with income. –A proportional tax is one in which the average tax rate stays the same across income levels. –A regressive tax is one in which the average tax rate falls with income. Average Tax Rate
Marginal tax rate: calculated as the change in tax liability divided by the change in taxable income. The marginal tax rate is highly important because it determines how much of an additional dollar of income must be paid in taxes (and so, how much one gets to keep). In this way, the marginal tax rate directly impacts an individual’s incentive to earn. Marginal Tax Rate
40 Ronald Reagan’s Deadweight Loss I came into the Big Money making pictures during WWII. You could only make four pictures and then you were in the top bracket. So we all quit working after four pictures and went off to the country.
At a tax rate of 0%, tax revenues would also be equal to $0. Tax rate (percent) Tax revenues 25 As the tax rates increase from 0% to some level A, tax revenues increase despite the fact some individuals choose not to work. 50 75 100 At a tax rate of 100%, nobody would work, and thus, tax revenues would be equal to $0. After some level B, increases in tax rates actually cause tax revenues to fall. As tax rates approach level C, tax revenues continue to fall. This is because the tax base shrinks faster than the increased revenues from higher tax rates. There is no presumption that the level of taxes at B is the ideal tax rate, only that B maximizes the tax revenue in the current period. Maximum The Laffer Curve A C B
43 1980 1990 87 192 153 58 149 153 Changes in Taxes Paid in the 1980s Personal Income Taxes Paid (by group, billions of 1982-1984 $) Top 1% Top 10% Other 90%