… a core topic in Economic Analysis and Atlas102
This topic deals with taxes other than income taxes and subsidies other than individual transfer payments.
The treatment of this topic on the Atlas follows almost precisely that in Chapter 4, Taxes and Subsidies, of the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics , accessed 28 April 2016).
Topic learning outcome Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of taxes and subsidies, including following core concepts.
Core concepts associated with this topic Readings
We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 49 minutes of MRU course videos listed below and doing the 29 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.
Atlas pages: Taxes and Subsidies and associated Concepts.
Tyler Cowen, Commodity Taxes, Marginal Revolution University, 11-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/taxes-subsidies-definition-tax-wedge , accessed 28 April 2016.
Tyler Cowen, Who Pays the Tax?, Marginal Revolution University, 9-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tax-burden-elasticity-affordable-care-act-health-insurance-mandate , accessed 29 April 2016.
Alex Tabarrok, Tax Revenue and Deadweight Loss, Marginal Revolution University, 12-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/deadweight-loss-definition-yacht-tax , accessed 29 April 2016.
Alex Tabarrok, Subsidies, Marginal Revolution University, 13-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/subsidies-definition-subsidy-wedge , accessed 29 April 2016.
Alex Tabarrok, Wage Subsidies, Marginal Revolution University, 4-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/wage-subsidies-minimum-wage-earned-income-tax-credit , accessed 29 April 2016.
Textbook readings in MPP and MPA courses
To come
Assessment questions (from MRU Practice Questions for Chapter 4)
From http://www.mruniversity.com/node/186781 , accessed 28 April 2016.
AQ102.04.01 Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curves have a negative slope while supply curves have a positive slope), if there is a tax, the equilibrium quantity must _______ and the price that buyers pay must _______.
Fall; rise
Fall; fall
Rise; fall
Fall; rise
AQ102.04.02 Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curve has a negative slope while supply curves have a positive slope), if there is a tax, the equilibrium quantity must _______ and the price that sellers receive must _______.
Fall; rise
Fall; fall
Rise; fall
Fall; rise
AQ102.04.03 Junk food has been criticized for being unhealthy and too cheap, enticing the poor to adopt unhealthy lifestyles. Suppose that the state of Oklakansas imposes a tax on junk food. For the tax to actually deter people from eating junk food, should junk food demand be elastic or inelastic?
Elastic
Inelastic
AQ102.04.05 If the Oklakansas government wants to strongly discourage people from eating junk food, when will it need to set a higher tax rate: When junk food demand is elastic or when it is inelastic?
Elastic
Inelastic
AQ102.04.06 Let’s take a look at the supply side of junk food. If junk food supply is highly elastic – perhaps because it’s not that hard to start selling salads with low-fat dressing instead of mayonnaise – and cheese-laden burgers – will a junk food tax have a bigger effect if supply were inelastic or elastic?
Elastic
Inelastic
IAQ102.04.07 f a government is hoping that a small tax can actually discourage a lot of junk food purchases, it should hope for:
Elastic supply and inelastic demand
Elastic supply and elastic demand
Inelastic supply and elastic demand
Inelastic supply and inelastic demand
AQ102.04.08 What does it mean that elasticity equals escape? (This is worth remembering: Elasticity is one of the toughest ideas for most economics students.)
People with elastic demands don’t like to pay taxes
It is easy for market participants to escape to another market if they have elastic demand or supply
Resources used to produce goods with elastic supply cannot be used for much else
AQ102.04.09 One way governments have tried to collect taxes from the wealthy is through the use of luxury taxes, which are exactly what they sound like: taxes on goods that are considered luxuries, like jewelry or expensive cars and real estate. What is true about the demand for luxuries?
It is elastic
It is inelastic
It is unit elastic
AQ102.04.10. Consider jewelry. Is a luxury tax more likely to hurt the buyers of jewelry, or the sellers of jewelry?
The buyers
The sellers
AQ102.04.11. Let’s apply the economics of taxation to romantic relationships. Sometimes relationships have taxes. Suppose that you and your boyfriend or girlfriend live one hour apart. Using the tools developed in the chapter, how can you predict which one of you will do most of the driving? That is, which one of you will bear the majority of the relationship tax?
The person with more inelastic demand for the relationship will bear the tax – he or she will do most of the driving.
The person with more elastic demand for the relationship will bear the tax – he or she will do most of the driving.
AQ102.04.12. In the opening scene of the classic Eddie Murphy comedy Beverly Hills Cop, Axel Foley, a Detroit police officer, is stopping a cigarette smuggling ring. Of course, smugglers don’t pay the tax when the cigarettes cross state lines. Which way do you suspect the smugglers were moving the cigarettes, based on economic theory?
From the high-tax North to the low-cost South
From the low-cost South to the high-tax North
AQ102.04.13. In our discussion of taxation, we’ve acted as if it were effortless to pass and enforce tax laws. But, of course, law enforcement officials including the Internal Revenue Service put a lot of effort into enforcing tax laws. Let’s think for a moment about what kind of taxes are easiest to collect, just based on the basic ideas we’ve covered. Who will make the most effort to escape a tax?
The party who is elastic
The party who is inelastic
Neither party
AQ102.04.14. Decades ago, Washington, DC, a fairly small city, wanted to raise more revenue by increasing the gas tax. Washington, DC, shares borders with Maryland and Virginia, and it’s very easy to cross the borders between these states. How elastic is the demand for gasoline sold at stations within Washington, DC? In other words, if the price of gas in DC rises, but the price in Maryland and Virginia stays the same, will gasoline sales at DC stations fall a little, or will they fall a lot?
Elastic – gasoline sales would fall a lot
Inelastic – gasoline sales would fall a little
AQ102.04.15. Given your answer on the previous question, how much revenue did it raise when it increased its gasoline tax?
A little revenue
A lot of revenue
AQ102.04.16. If DC, Maryland, and Virginia all agreed to raise their gas tax simultaneously, how much revenue could the gas tax raise? Note: These states have heavily populated borders with each other, but they don’t have any heavily populated borders with other states.
A little revenue
A lot of revenue
AQ102.04.17. Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. What possible price for the haircut would be beneficial to both Maria and Juan?
$20
$30
$45
AQ102.04.18. Given that Maria and Juan find a price suitable to both of them, how much total surplus (i.e., the sum of consumer and producer surplus) would be generated?
$15
$30
$10
AQ102.04.19. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what is one price that will make both Maria and Juan better off?
$28
$30
$42
There are no prices that are suitable to both Maria and Juan
AQ102.04.20. Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what will happen to the $15 of economic benefit?
It will decrease
It will increase
It will stay the same
AQ102.04.21. Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If a previous $5 tax increases to $20, will the haircut transaction still happen?
Yes
No
AQ102.04.22. The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?
The impact on prices
The impact on quantities
AQ102.04.23. Fill in the blanks: When the government subsidizes an activity, resources such as labor, machines, and bank lending will tend to gravitate __________ the activity that is subsidized and will tend to gravitate ___________ activity that is not subsidized.
toward; away from
toward; toward
away from; toward
away from; away from
AQ102.04.24. Fill in the blanks: When the government taxes an activity, resources such as labor, machines, and bank lending will tend to gravitate _________the activity that is taxed and will tend to gravitate ________ activity that is not taxed.
toward; away from
toward; toward
away from; toward
away from; away from
AQ102.04.25. Some people with diabetes absolutely need to take insulin on a regular basis to survive. Pharmaceutical companies that make insulin could find a lot of other ways to make some money. If the U.S. government imposes a tax on insulin producers of $10 per cubic centimeter of insulin, payable every month to the U.S. Treasury, who will bear most of the burden of the tax?
Insulin producers
People with diabetes
Not enough information is given
AQ102.04.26. Suppose instead that because of government corruption, the insulin manufacturers convince the U.S. government to pay the insulin makers $10 per cubic centimeter of insulin, payable every month from the U.S. Treasury. Who will get most of the benefit of this subsidy?
Insulin producers
People with diabetes
Not enough information is given
AQ102.04.27. What effect do wage subsidies have on employment?
Wage subsidies increase employment
Wage subsidies decrease employment
Wage subsidies have no effect on employment
AQ102.04.28. What effect do wage subsidies have on the demand for welfare payments?
Wage subsidies increase the demand for welfare payments
Wage subsidies decrease the demand for welfare payments
Wage subsidies have no effect on the demand for welfare payments
AQ102.04.29. Which one of the following options is a real life example of a wage subsidy?
Food stamps (SNAP)
Housing assistance
The Earned Income Tax Credit
The minimum wage
AQ102.04.30. Fill in the blanks: Wage subsidies ____ the demand for labor and the number of low skilled jobs. The minimum wage laws ____ the demand for labor and the number of low skilled jobs.
increase; increase
increase; decrease
decrease; increase
decrease; decrease
Page created by: Ian Clark, last modified on 16 May 2016.
Image: Minute 8:40 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/taxes-subsidies-definition-tax-wedge , accessed 19 April 2016.
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