Post on 28-Feb-2018
transcript
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Econ S-1814
Danny Shoag
Lecture 9: Introduction to Taxation
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Outline
Warning!! Boring but important!
! Demand & Supply Curves:! Aggregation
! Consumer + Producer Surplus
! Elasticity
! Taxes! Deadweight loss
! Incidence
More interestingExamples
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Taxation
(drawing heavily from Chetty lectures)
! Who pays a tax? Who gets a subsidy?! Tobacco tax, EITC, food stamps, etc
! Key Idea: Statutory Incidence !Economic Incidence
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Reminder about Demand Curves
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0 10 20 30 40 50 60
Price
Quantity
Demand Curve
Price Number of people willing to
pay that price
!" #"
$! ##
$" #!
#! $"
#" !"%" %""
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Demand Curves
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Price
Quantity
Demand Curve
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Calculating Consumer Surplus
Price People Reason Formula Surplus
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#" '()'*( +,**,-. /) '01 2!"
3-*1 405( /) '01 26" #"782!"926":
2$""
$! ##
# ;)
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Graphing Consumer Surplus
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Price Elasticity
! What does it mean?
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Price Elasticity
! What does it mean?
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Price Elasticity
! What does it mean?
! A percent in demand/supply for a one percent change in price
! Unit free!
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Elasticity
! That formula can be rewritten:
! The numerator is the slope of the demand/supply curve with
respect to price
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Calculating a Demand Elasticity
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0 10 20 30 40 50 60
Price
Quantity
Demand Curve
Price QuantityDemanded
PercentChange in
Price
PercentChange in Q
!" #"
$! ##
$" #!
#! $"
#" !"
%" %""
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Calculating a Demand Elasticity
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0 10 20 30 40 50 60
Price
Quantity
Demand Curve
Price QuantityDemanded
PercentChange in
Price *
PercentChange in Q
!" #"
$! ## 9%"> %">
$" #! 9%#> %#>
#! $" 9$=> $=>
#" !" 9#!> #!>
%" %"" 9%""> %"">
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Calculating a Demand Elasticity
! The elasticity here is -1. When the price goes down by 1% , the
quantity demanded goes up by 1%.
! Here the elasticity is constant (doesnt depend on where you are onthe curve). That doesnt have to be true!!
Price QuantityDemanded
PercentChange in
Price *
PercentChange in Q
50 20
45 22 -10% 10%
40 25 -12% 12%
25 40 -46% 46%
20 50 -25% 25%
10 100 -100% 100%
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Supply
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0 10 20 30 40 50 60
Price
Quantity
Supply Curve
Price Quantity
Supplied
!" ?"
$" =$
6" $?
%" %=
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Supply
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0 10 20 30 40 50 60
Price
Quantity
Demand & Supply Curves
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Equilibrium
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Price
Quantity
Equilibrium
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Producer Surplus
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Total Surplus
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What does a tax do?
! Excise tax per unit. Ad valorem fraction of the price.
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What does a tax do?
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What does a tax do?
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What does a tax do?
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Levied on the demand side
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Levied on the demand side
$7.5
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Levying on the demand side
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Why is this true?
! Post tax equilibrium with supplier taxes is given by
!We can take the total differential:
! This is the change in the price actually paid by consumers
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Why is this true?
! Post tax equilibrium with supplier taxes is given by
!We can take the total differential:
! This is the change in the price actually paid by consumers
Multiplyall terms
By P/Q
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Why is this true?
! Post tax equilibrium with supplier taxes is given by
!We can take the total differential:
! How do we know its positive?
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Why is this true?
! Post tax equilibrium with supplier taxes is given by
!We can take the total differential:
! This is the change in the price actually paid by consumers
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Why is this true?
! Suppose we now put the tax on the consumer side
! Price paid by consumers is p+ t!
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Why is this true?
! Suppose we now put the tax on the consumer side
! Price paid by consumers is p+ t!
Multiply
all terms
By P/Q
again
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Why is this true?
! Suppose we now put the tax on the consumer side
! Price paid by consumers is p+ t!
This is
equal to 1I justreplaced it
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Why is this true?
! Suppose we now put the tax on the consumer side
! Price paid by consumers is p+ t!
Same as
before!
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Perfectly Inelastic
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Perfectly Elastic
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Deadweight Loss
! DWL = !"Q "t
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Deadweight Loss
! DWL = !"Q "t
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Deadweight Loss
! DWL = !"Q "t
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Deadweight Loss
! DWL = !"Q "t
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Deadweight Loss
! DWL = !"Q "t
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Deadweight Loss
! DWL = !"Q "tDeadweight Loss
* Grows with the square of the
tax rate
*Increases with the elasticities
* Increases with the budget share
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Examples finally!
! State tobacco taxes whats your prior?
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Examples finally!!
Evans, Ringel, & Stech: pass-through estimates ~100%! Demand elasticity is about -.42
! What does that imply about supply-elasticity?
! What does this tell us about the market?! Who bears pays the tax?
! Interesting fewer cig purchasessame cotinine in lungs
--Elasticity!
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Hastings & Washington
! NV gave food stamps at the first of the month
! Grocery expenditure for benefit households is 20-30%
higher in the first week
! Stores in poor neighborhoods raise prices 3% that week
! What does this tell us about that market?
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Hastings & Washington
! Who benefits from this policy?
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Other Examples
! EITC and low-wages workers (Rothstein) ! Employers can lower wages and people will still work
! Finds EITC workers gain $.70 per $1, employers gain $.70,
ineligible low-skilled workers loss $.4
! Medicare part D (Friedman)
! Capitalization in to asset prices
! Drug companies captured about 1/3 of the surplus
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Last Example (Linden & Rockoff)
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Linden & Rockoff
! Housing Prices fall 4% -- huge implied cost!
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Thought Experiment
! Suppose your state wanted to enhance maternity benefits.What will determine who benefits?
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Think about for next time
! How do these forces differ at local and national levels?
! Local market power vs. national market power
! Ability for workers and capital to move
! Salience and evasion opportunities