AP Microeconomics Unit 2 Days 4 amp 5 Rixie Excise tax A perunit tax on the production of a good imposed by the government for one of two reasons To increase government revenue To decrease consumption of a harmful good ID: 561949
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Slide1
Excise Taxes, Subsidies, & Trade Barriers
AP Microeconomics
Unit 2,
Days 4 & 5
StaterSlide2
Excise Taxes
Part 1Slide3
Excise tax
A per-unit tax on the production of a good, imposed by the government for one of two reasons:
To increase government revenue
To decrease consumption of a harmful good
Examples?
***Shifts the SUPPLY curve vertically by the tax amount (technically it is a shift left, as it is a decrease in supply)***Slide4
Government Revenue
Results whenever an excise tax (including tariffs) is applied to a good.
Calculated by multiplying the amount of the tax times the NEW
quantity
(Tax x Q)Gov’t revenue is bigger the more inelastic the demandSlide5
Relationship between elasticity of
demand
and excise taxes
The more
inelastic the demand, the: Larger the gov’t revenue;Smaller the decrease in consumption.
The more
elastic
the
demand,
the:
Smaller the gov’t revenue;
Larger the decrease in consumption.Slide6
Tax Incidence - Burden on consumers or producers?
The more
elastic
the demand OR the more
inelastic
the supply: The more the incidence falls on producers, because they are less equipped to respond.
The more
inelastic
the demand OR the more
elastic
the supply:
The more the incidence (or burden) falls on
consumers
, because they are less equipped to respond.Slide7
Excise Tax Practice Problem
Copy the
graph.
Label the equilibrium price & quantity.
Assume there is a $3.00 excise tax imposed on
this good. Shift the supply curve accordingly & label it ST.Label the new price
& quantity
. What happened to each?
Label the rectangle that represents government revenue, and calculate.
Label consumer surplus, producer surplus, & the DWL triangle, and calculate.Slide8
Excise Tax Practice ProblemSlide9
Gov’t Tax Revenue
CS
PS
DWL
S
+
taxSlide10
Add-on Question to graph (to come back to after finishing notes)
If
the demand curve were
more inelastic
, would the government revenue increase or decrease? Would consumption decrease more or less drastically? Would the tax incidence shift more toward consumers or producers?Slide11
Perfectly Inelastic Demand
Ed = 0
Revenue
Largest government revenue
No effect on quantity demanded (no decrease in consumption)
Consumers pay for the tax by paying a higher priceSlide12
Smallest government revenue
Largest effect on quantity demanded (decrease in consumption!)
Producers pay for the tax
Perfectly Elastic Demand
Ed = infinity
RevenueSlide13
Deadweight Loss (DWL)
Net benefit lost by society caused by a movement away from market equilibrium
Excise taxes result in DWL.
Represented by a triangle on the graph.
It USED to be consumer & producer surplus! (when the market was in equilibrium)
DWLSlide14
Subsidies & Trade Barriers
Part 2Slide15
Group questions – Part 1
(
5 minutes
)
A
subsidy is a payment made by the governmentto a firm for its production of a certain product or service.Why do you think the government would ever subsidize a product?
In contrast to an excise tax, how would a subsidy affect the production cost of good X?
How will a subsidy shift the supply curve of good X? Demonstrate on a graph.
What will happen to the
equilibrium price and quantity of
good X?Slide16
Imports & Trade
barriers: Definitions
(Add these to notes!)
Import
: Any good produced abroad but consumed domestically
Revenue tariff: an excise tax levied on an import that is NOT produced in the domestic market (ex: bananas)Protective tariff: an excise tax levied on an import that IS produced in the domestic market (ex: steel)
Import quota
: a maximum amount of a good that can be imported into the domestic marketSlide17
Class discussion questions
(
5
minutes)
Using the definitions of the various
trade barriers,answer the following:What do you think is the primary purpose of a revenue tariff?
Why would we want to import goods that are already being made in our country?
What do you think may be the purpose of a protective tariff?
What do you think is an important distinction between tariffs and quotas?
What might be some negative effects of both?Slide18
Effects of a Tariff on the domestic
market
https://www.youtube.com/watch?v=zhD--
UeRiOI
Identify the following:
Consumer surplus (use letters) – before and after the tariff
Producer surplus (use letters) – before and after the tariff
Government tax revenue (use letters)
Deadweight loss (use letters) resulting from the tariff