Impact of Taxes on Equilibrium Price & Quantity in Competitive Markets - Prof. 8125, Apuntes de Negocios Internacionales

¡Descarga Impact of Taxes on Equilibrium Price & Quantity in Competitive Markets - Prof. 8125 y más Apuntes en PDF de Negocios Internacionales solo en Docsity! TOPIC 4: 
 TAXES AND WELFARE Bibliography: [BM] Chap. 3 [M] Chap. 6 Additional Readings: See Aula Global 1 What will we learn today? How about something from the newspapers? 2 Distribution of Buyers and Sellers (No Tax) - Data Selller’s cost Number of Agents Buyer’s Value Number of Agents 3 2 45 2 8 2 40 2 13 2 35 2 18 2 30 2 23 2 25 2 28 2 20 2 Price Intervals (P) Quantity supplied(Q) P<3 0 3<P<8 2 8<P<13 4 13<P<18 6 18<P<23 8 23<P<28 10 P > 28 12 Supply Table (No Tax) – We have to find out 5 Supply Table ! Supply Curve Q P 5 25 2 12 P Q P <3 0 3 <P <8 2 8 <P <13 4 13 <P <18 6 18 <P <23 8 23 <P <28 10 P> 28 12 10864 Selller’s cost Number of Agents Buyer’s Value Number of Agents 3 2 45 2 8 2 40 2 13 2 35 2 18 2 30 2 23 2 25 2 28 2 20 2 Price Intervals (P) Quantity demanded (Q) P>45 0 40<P<45 2 35<P<40 4 30<P<35 6 25<P<30 8 20<P<25 10 P<20 12 Distribution of Buyers and Sellers (No Tax) - Data Demand Table (No Tax) – We have to find out 7 A SALES TAX • We will impose a sales tax of 15€, which will be collected from suppliers • How does this tax affect the supply curve? – Any supplier who sells will now have to pay a tax of 15€ on top of her production cost – For example: with the tax, a supplier with a production cost of 8€ will loose money if she sells a bushel of apples for less than 8€ + 15€ = 23€ ⇒The tax increases the minimum price at which a supplier is willing to sell each unit by 15€ • How does the tax affect the demand curve? – It doesn’t change. The buyer’s value stay unchanged, since they don’t have to pay a tax 10 Selller’s cost Number of Agents Buyer’s Value Number of Agents 3 2 45 2 8 2 40 2 13 2 35 2 18 2 30 2 23 2 25 2 28 2 20 2 Price Intervals (P) Quantity supplied(Q) Distribution of Buyers and Sellers (Sales Tax of 15€) - Data Supply Table (Sales tax of 15€) – We have to find out 11 Selller’s cost Number of Agents Buyer’s Value Number of Agents 3+15 2 45 2 8+15 2 40 2 13+15 2 35 2 18+15 2 30 2 23+15 2 25 2 28+15 2 20 2 Price Intervals (P) Quantity supplied(Q) P<18 0 18<P<23 2 23<P<28 4 28<P<33 6 33<P<38 8 38<P<43 10 P > 43 12 Distribution of Buyers and Sellers (Sales Tax of 15€) - Data Supply Table (Sales tax of 15€) – We have to find out 12 A Consumption Tax • We will impose a consumption tax of 15€, which will be collected from demanders • How does a consumption tax affect the supply curve? –It doesn’t change. Sales costs do not change and suppliers don’t have to pay any taxes • How does a consumption tax affect the demand curve? –When a buyer acquires one unit, she receives her buyer value, but has to pay a consumption tax of 15€ –For example, a buyer with a value of 40€ will be willing to pay up to 25€ to avoid loosing money: 40€ = 25€ (price) + 15€ (tax). –The tax reduces by 15€ the maximum willigness to pay 15 Seller’s cost Number of Agents Buyer’s Value Number of Agents 3 2 45 2 8 2 40 2 13 2 35 2 18 2 30 2 23 2 25 2 28 2 20 2 Price Intervals (P) Quantity demanded (Q) Distribution of Buyers and Sellers (Consumption Tax of 15€) - Data Demand Table (Consumption Tax of 15€) – We have to find out 16 Seller’s cost Number of Agents Buyer’s Value Number of Agents 3 2 45-15 2 8 2 40-15 2 13 2 35-15 2 18 2 30-15 2 23 2 25-15 2 28 2 20-15 2 Price Intervals (P) Quantity demanded (Q) P>30 0 25<P<30 2 20<P<25 4 15<P<20 6 10<P<15 8 5<P<10 10 P<5 12 17 Distribution of Buyers and Sellers (Consumption Tax of 15€) - Data Demand Table (Consumption Tax of 15€) – We have to find out Comparison of a Sales and Consumption Tax of the same magnitude • Sales Tax: P*=31.5, Q*=6 – Seller’s price: 31.5-TAX=31.5-15=16.5 – Buyer’s price: 31.5 • Consumption tax: P*=16.5, Q*=6 – Seller’s price: 16.5 – Buyer’s price: 16.5+TAX=16.5+15=31.5 • Result: It doesn’t matter who pays the tax, price paid and received ends up being exactly the same! 20 • Given a per unit tax, in the competitive equilibrium, the equilibrium after tax price and quantity (paid by buyers or received by sellers) are exactly the same, regardles of whether the tax is a consumption or sales tax • As a consequence, buyers and sellers profits are also the same, regardless of whether the tax is a consumption or sales tax Proposition The real effects of a per unit tax do not depend on whether the tax is paid by buyers or sellers 21 Taxes and Welfare • Efficiency in competititve markets: 
 The First Welfare Theorem – A result in the market is (Pareto) efficient if the sum of the surpluses obtained by the participants in the market is the highest possible. – A competitive equilibrium is efficient if “there does not exist other price/quantity pair that generates a higher total surplus for the participants in the market” 22 Total Surplus without Tax • Producer’s Surplus: – Revenue=Price*Quantity=24*10=240 – Cost=2*(3+8+13+18+23)=130 – Profit=Revenue-Cost=240-130=110 • Consumer’s Surplus: – WTP (Value)=2*(45+40+35+30+25)=350 – Price=24*10=240 – Surplus=WTP-Price=350-240=110 • Total Surplus=110+110=220 25 Total Surplus without Tax By the First Welfare Theorem, we know that: – The competitive equilibrium (without intervention) is efficient – It maximizes the total surplus 26 • The government introduces a consumption tax of 15€ • The demand curve shifts downward in 15€ Total Surplus With a Consumption Tax 27 Total Surplus With a Consumption Tax • Total Surplus = 51 + 51 = 102 • And the tax revenue? – Per unit tax!15 – Units sold!6 – Tax revenue = 15*6 = 90 • Total Benefit = 102 + 90 = 192. 30 • Total Surplus WITHOUT TAX = 220€ • Total Surplus WITH TAX
 (Consumer’s surplus + 
 Producer’s surplus +
 Tax revenue) = 192€ • Dead Weight Loss (excess burden) = 220-192 = 28€ Don’t forget to add also the tax collection which is repaid to all citizens (here buyers and sellers) Surplus WITH vs. WITHOUT tax 31 Surplus WITH vs. WITHOUT tax New demand curve 3 New equilibrium 6 Tax Revenue A C DB COffer curve Demand curve Cprice Price Quantity Equilibrium Surplus without tax = 
 Area (A+B+C+D) Surplus with tax = 
 Area (A+B+C) Efficiency loss = 
 Area D Dead Weight Loss 32 16.5 • Demand: P=30-Q • Supply: P=5+Q • The government imposes a sales tax of 10€ Taxes with Continuous Supply and Demand Curves 35 Equilibrium with and Without TAX • No tax: – Demand=Suppy: • With tax: – Demand=New Supply: * *12.5, 17.5Q P= = 30 5Q Q− = + 530 1 QQ = +− ** **7.5, 22.5PQ = = 36 Equilibrium with and Without TAX Q P 10 15 5 20 Supply: P = 5+Q Demand: P=30-Q Equilibrum without tax: 
 Demand=Supply 105 20 Supply with a 10€ Sales Tax: P = 15+Q 15 Equilibrium with Tax 25 30 25 30 17.5 7.5 12.5 22.5 37 Dead Weight Loss • In general, when we impose a tax in a competitive market, there will be an efficiency loss • There are some special cases: HW3 40 • We have proved that taxes generate a efficiency loss ! Why do we have taxes? 1. (Pareto) Efficiency is not a guarrantee of “justice” 2. Markets might not be perfect, i.e. It might be the case that prices are not aggregating the right information • Taxes/Subsidies have two objectives: – Correct a market imperfection 
 (for example, when there are externalities – Topic 8) – Make the market allocation more “fair”
 (Redistributive taxes, for example, income taxes) Then…Why the @#$% do we have taxes? 41 Examples • Example of a tax that corrects a market inefficiency: License taxes that vary with the amount of pollution that the car produces • Example of a tax that reduces inequality: Income tax (Impuesto sobre la Renta de las Personas Físicas – IRPF) 42 Summary Sales and Consumption Tax: • How does it affect the supply and demand curve? • How does it affect P* y Q*? • How does it affect consumer’s and producer’s surplus? • Who bears most of the tax burden? • First welfare theorem: Efficiency of competitive markets • Inefficiencies induced by taxes: Dead Weight Loss • Objectives of taxes 45 Recommendations and HW • Recommendations: • Read Topic chapter 3 [BM] and Appendices A.3, A.4, and A.5, [M] Chap. 5 – Do exercises 3.1-3.8 (pages 73-77) – Hand in HW2: Next seminar! STAPLED, with your NAME, NIA, and SEMINAR GROUP 46