Government Intervention: Taxes and Economic Burden

Introduction

• Course structure: previously focused on supply and demand, leading to equilibrium.
• Now applying these concepts to analyze different policies, starting with government intervention.

Tax on Sellers

Case Study: Cigarettes

• Cigarettes are heavily taxed in various cities (e.g., Chicago, Philadelphia, Washington D.C.).
• Purpose: discourage smoking and raise government funds.

Impact of a $3 Tax on Cigarettes

• Supply Curve Shift: Supply curve shifts upward by $3 due to increased marginal cost.
  • Initial equilibrium: $5 per pack, 15 packs.
  • New equilibrium: price rises to $7, quantity decreases.

Economic Impact

• Buyers: Pay $2 more per pack.
• Sellers: Receive $1 less per pack.
• Both share the economic burden despite the seller paying the tax directly.

Statutory vs. Economic Burden

• Statutory Burden: Who writes the check to the government (sellers in this case).
• Economic Burden: Actual financial impact on buyers and sellers.
• Observation: Economic burden is shared, regardless of statutory burden allocation.

Tax on Buyers

Impact of a $3 Tax on Buyers

• Demand Curve Shift: Demand curve shifts downward by $3.
• New equilibrium: price tag shows $4, but buyers pay $7 including tax.
• Comparison: Similar impact as a tax on sellers in terms of prices and quantities.

Invariance of Tax Incidence

• Economic burden remains constant irrespective of who pays the statutory tax.
• Money flow to the government is consistent; economic burden remains unaffected.

Why Statutory Burden Matters

• Tax Evasion: Easier to track and enforce taxes on sellers.
• Perception and Fairness: Affects public perception and policies, e.g., Social Security tax division.

Elasticity and Tax Burden

Relationship

• Elasticity: Determines who bears more of the tax burden.
• Elastic Demand/Supply: Less burden.
• Inelastic Demand/Supply: More burden.

Examples

• Gasoline: Inelastic demand, buyers bear more burden.
• Cinnamon Toast Crunch: Elastic demand, less revenue generated due to easy substitution.

Subsidies

• Function as negative taxes: government pays buyers/sellers.
• Examples: Airline subsidies, renewable energy incentives, marriage tax benefits.

Practice Problems

• Review problems on elasticity and supply shifts.
• Understanding responsiveness and market impact of elasticity.

These notes summarize the lecture's focus on taxes, statutory and economic burdens, elasticity, and the implications of government interventions in markets.