emba sem i managerial economics session6-costs of taxation
TRANSCRIPT
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8/10/2019 EMBA Sem I Managerial Economics Session6-Costs of Taxation
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Managerial EconomicsExecutive MBA Program
Session 6: Costs of Taxation
InstructorSandeep [email protected]
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How do taxes affect the
economic well-being of marketparticipants?
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Tax Effect
Taxrevenue(T Q)
Size of tax ( T )
Quantitysold ( Q )
Quantity 0
Price
Demand
Supply
Quantity
without tax
Quantity
with tax
Price buyerspay
Price sellersreceive
Governments tax revenue = T Q; wh ereT = the size of the tax
Q = the quantity of the good sold
CS
PS
??
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How a Tax Effects Welfare?: Deadweight Loss !
A
F
B
D
C
E
Quantity 0
Price
Demand
Supply
= P B
Q 2
= P S
Pricebuyers
pay
Pricesellers
receive
= P 1
Q 1
Pricewithout tax
A deadweight loss is thefall in total surplus thatresults from a marketdistortion, such as a tax.
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Is there any relationshipbetween Elasticity and
Deadweight Loss?
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Tax Distortions and Elasticities
(a) Inelastic Supply
Price
0 Quantity
Demand
Supply
Size of tax
When supply isrelatively inelastic,the deadweight lossof a tax is small.
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Tax Distortions and Elasticities
(b) Elastic Supply
Price
0 Quantity
Demand
SupplySizeof
tax
When supply is relativelyelastic, the deadweightloss of a tax is large.
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Tax Distortions and Elasticities
Demand
Supply
(c) Inelastic Demand
Price
0 Quantity
Size of taxWhen demand isrelatively inelastic,the deadweight loss
of a tax is small.
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Tax Distortions and Elasticities
(d) Elastic Demand
Price
0 Quantity
Sizeof
taxDemand
Supply
When demand is relativelyelastic, the deadweightloss of a tax is large.
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DETERMINANTS OF THEDEADWEIGHT LOSS
The greater the elasticities of demandand supply: the larger will be the decline in
equilibrium quantity and, the greater the deadweight loss of a tax.
Policy makers should be careful beforeimposing Taxes on Products !!
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Is there any relationshipbetween DEADWEIGHT
LOSS and TAX REVENUE asTaxes very?
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Revenueand Tax Size
Q
P
D
S
Small Tax
P
Q
D
S
Medium Tax
P
D
Q
S
Large Tax
Tax Revenue DeadweightLoss
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How Deadweight Loss and Tax Revenue Vary with the Sizeof a Tax
(a) Deadweight Loss Deadweight
Loss
0 Tax Size
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How Deadweight Loss and Tax Revenue Vary with the Sizeof a Tax
(b) Revenue (the Laffer curve) Tax
Revenue
0 Tax Size
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Numerical ProblemsConsider the previous market with Demand curve q = 16 10p andSupply curve q = 8 + 20p . (Here q is in millions of kg. and p is indollars per kg.). Imagine that the government imposes a $0.60 per-unittax on the prices that buyers pay. Calculate the deadweight loss due toimposition of tax in this market.
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Numerical ProblemsConsider the previous market with Demand curve q = 16 10p andSupply curve q = 8 + 20p . (Here q is in millions of kg. and p is indollars per kg.). Imagine that the government imposes a $0.60 per-unittax on the prices that buyers pay.Deadweight loss= $1.2 million
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Thank you