Class 40 - Dead Weight

An excise tax makes sellers pay. The sellers send money to the government – legally. Putting a $1 tax on something causes the supply curve to shift out and the price rises by less than the dollar.

The cost of taxes is the value of forgone trades. The value (not money) of the products that don’t get sold due to the tax= dead weight loss.

Taxes are just transfers but they change people’s behaviors. Taxes make people substitute. They give sellers an incentive to sell other things.

Resources collect taxes inefficiently so America has a 30% dead weight loss.

Buyers pay sales tax = Taxes cause demand curves to shift by the amount of the tax.

Excise and sales tax graphs look the same. Legal incidence of taxes doesn’t matter; they’re independent of economic incidence.

Economic incidence is determine by relative elasticity of supply and demand. A steep demand curve is inelastic.

The party less sensitive to price change will bear the burden of the tax.
*More elastic = bare less burden

Economic burden is a function of the slopes!!!

ECONOMIC IMPACT OF TAX = how much worse off you are compared to beginning after taxed
buyers - how much more they pay for product
sellers - how much less they take home for product