Micro Chapter 29

1. Micro Chapter 29 Presentation 1- Tax Incidence

2. Public Choice Theory • Economic analysis of government decision making, politics and elections • ***majority voting can lead to inefficiency and inconsistency

3. Tax Incidence • The person or group that pays for the tax

4. P 14 12 10 Price (Per Bottle) 8 6 4 2 0 5 10 15 20 25 Q Quantity (Millions of Bottles Per Month) Tax Incidence Efficiency Loss of a Tax S’ Tax Paid by Consumers S Tax $2 Efficiency Loss (or Deadweight Loss) Tax Paid by Producers D

5. P P 0 0 Q Q Tax Incidence Demand Elasticity and the Incidence of an Excise Tax St St Tax Tax S S a Pi a Pe b P1 P1 b De Pb Pa c c Dt Q2 Q1 Q2 Q1 Tax Incidence and Elastic Demand- burden on the supplier Tax Incidence and Inelastic Demand- burden on the consumer

6. P P 0 0 Q Q Tax Incidence Supply Elasticity and the Incidence of an Excise Tax St S Tax Tax St a Pe S a Pi b b P1 P1 Pa c Pb c D D Q1 Q1 Q2 Q2 Tax Incidence and Elastic Supply- consumers pay Tax Incidence and Inelastic Supply- producers pay

7. Logrolling • The trading of votes by legislators to secure favorable outcomes on decisions concerning the provisions of public and quasi-public goods (ie education, fire protection)

8. Paradox of Voting • A situation where paired-choice voting by a majority rule fails to provide a consistent ranking of society’s preferences for public goods or services • **may be skewed by the order of the vote- voter apathy

9. Median Voter Model • Theory that under majority rule the middle voter will be in the dominant position to determine the outcome of an election • Ex- extreme voters prefer middle option over the other extreme

10. Implications of the Median Voter Model • 1. dissatisfied voters because they either favor more or less government intervention • 2. people “vote with their feet”- move to locations with similar voters

11. Rent-Seeking Behavior • The appeal to government at taxpayers’ or someone else’s expense • EX- gov’t construction projects to union laborers • Large subsidies to farmers • High tariffs on imported goods

12. Government Failure • Inefficiencies in resource allocation • Caused by pressure from special interest groups, short-sighted political behavior, and bureaucratic inefficiency

13. Special Interest Effect • Any result of government promotion of the interests of a small group at the expense of a much larger group • Small number of people obtain a government policy/program that gives them large gains at the expense of a larger group

14. Pork Barrel Politics • Securing government funds for local projects that benefit only a small amount of constituents while paid for by a large scattering of tax-payers • Added to a non-related bill to obtain votes

15. Benefits Received Principle • Those who benefit most from government-supplied goods or services should pay the taxes necessary to finance them • EX- gasoline taxes used for highway repairs

16. Problems with Benefits Received • 1. Very difficult to measure how much individuals benefit from public goods • 2. Tax unemployed workers for unemployment benefits?

17. Ability-to-Pay Principle • The tax burden should be apportioned according to the taxpayers’ income and wealth