Taxes and Their Economic Impact 🏦

Introduction to Taxes

• Mr. Clifford discusses taxes in the context of supply, demand, consumer surplus, and producer surplus.
• Per unit tax (excise tax): A tax imposed on producers for each unit of a product.

Example with Milk

• Equilibrium price: $3 before tax.
• Tax imposed: $2 per unit.
• New supply curve: Shifts left due to the tax.

Price Changes Due to Tax

• New consumer price: $4 (not $5).
• Producer's effective price: $2 (after paying $2 tax).
• Tax spotting: Vertical distance between supply curves indicates per unit tax ($2).
• Tax revenue: $160 (from $2 tax * 80 units).
• Three entities involved post-tax: Consumers, producers, government.
• Total milk expenditure: $4 * 80 = $320.
• Government's share: $160.
• Producer's share: $160.

Impact on Consumer and Producer Surplus

• Consumer surplus: Difference between what consumers are willing to pay vs. what they actually pay.
  • Before tax: Larger triangle.
  • After tax: Smaller triangle.
• Producer surplus: Amount producers benefit above their cost of production.
  • Before tax: Larger area.
  • After tax: Smaller area.
• Deadweight loss: Loss of total surplus due to inefficiency (reduction in quantity sold from 100 to a lower amount).

Elasticity of Demand

• Example with inelastic demand curve: Higher price sensitivity to taxes.
  • Original price: $12.
  • New price after tax: $14.
  • Tax per unit: $3 (vertical distance).
  • Tax revenue: $30 (from $3 tax * 10 units).
  • Total expenditure on milk: $140 (from $14 * 10).
  • Producer's revenue post-tax: $110 ($11 per unit).

Division of Tax Burden

• Elasticity's role: Determines the share of tax paid by consumers vs. producers.
• *Different scenarios: Elasticity's impact on tax division:

1. Perfectly inelastic demand: Consumers pay all of the tax.
2. Relatively inelastic demand: Consumers pay the majority.
3. Unit elastic demand: Consumers and producers share the tax equally.
4. Relatively elastic demand: Producers pay more.
5. Perfectly elastic demand: Producers pay all of the tax.

Key Insights and Conclusion

• Draw graphs: Helpful for understanding the impact of different elasticities on tax burden.
• Upcoming lessons: Consumer choice and utility maximization.
• AP exam review apps: Recommended for further study and preparation.

Final Remarks

• Mr. Clifford emphasizes understanding tax impacts on markets through supply and demand analysis.