Unit 1 MicroWelfare Effects of Indirect Taxes and

Subsidies

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Consumer burden

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Consumer burden

Welfare Effects of a Tax and a Subsidy

Costs and Benefits

Output

Demand

Supply pre tax

A

B

Supply post tax

B

C

Consumer pays B

Supplier receives C

Tax revenue

Consumer burden

Producer burden

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? _________

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the _________________

In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ___________

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? _________

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the Consumer

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the Consumer

In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ___________

Quick Test!An indirect tax on the production of a good will have no effect on price if the price elasticity of demand is? Infinity

If elasticity of demand for a product is (-) 0.4 then the majority of the burden of a tax on the producer will be paid by the Consumer

In the event of a new tax on a product, the price will rise by the full amount of the tax when the price elasticity of demand is ZERO

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

ESupplier

receives C

Consumer pays B

Welfare effects of a subsidy

Costs and Benefits

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

ESupplier

receives C

Consumer pays B

Subsidy payment

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

E

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

E

A subsidy when demand is price elasticPrice

Output

Demand

Supply post subsidyA

B

Supply pre subsidy

C

D

E

Elastic demand – so a subsidy causes a large rise in quantity demanded

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