The city government is considering two tax proposals. For consumers, the difference between the specific tax and the lump sum tax is that. That is, everyone owes the same amount, regardless of earnings or any actions that a person might take. Derive the tax rates if they are trying to maximize area population and compare with the setting where they are maximizing average welfare of their citizens. Apr, 2014 the presentation is intended to help the ap or ib microeconomics teacher easily explain the effects of a lump sum tax or subsidy or perunit tax or subsidy. Apr 15, 2018 in addition, a lump sum tax is a tax where everyone pays the same dollar amount in taxes, regardless of income.
If a person earns additional income, he or she does not pay any additional lumpsum tax. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. To sum up, the law of demand says that the quantity of a. This section provides lecture notes from the course. Lump sum taxes, such as sales taxes, property taxes on cars and business equipment, and excise taxes, are thought to be regressive since lower income people must apply a higher percentage of their income to the tax. Why do lump sum transfers affect the price ratio in the social planners problem. You can skip questions if you would like and come back. The lump sum principle many economic insights stem from the recognition that utility ultimately depends on the income of individuals and on the prices they face. Its known then that the price ratio changes relative to when there are no lump sum transfers. The subtopics for each lecture are related to the chapters in the textbook. That is, a tax of some fixed amount that does not correspond with the number of units marge decides to buy of either. The goal of this book is to explain how people interact economically, understanding the relationship between people, supply and demand, markets, and efficiency.
The lump sum principle as it applies to taxation is illustrated in figure 4. Therefore, in this part, the main question we want to answer is how does the interaction of demand and supply. A onetime payment from producers to the government. If a person earns additional income, he or she does not pay any additional lump sum tax. Lump sum tax is a tax t which is simply taken out of income m when levied on persons or taken out of profits u. Consider the scenario, in which a consumer chooses consumption and. Lump sum amount agent willing to pay to avoid tax at pretax prices. The city government is considering two tax principles. A lumpsum tax, with everyone paying a fixed amount, is the. Lump sum tax a tax that is the same for everyone, regardless of any actions people take. For example, numbers, the fourth book of the hebrew bible, starts with the lord instructing moses. In part d students had to explain the effect of patent expiration on economic profits. In the long run, number of firms will change, and also the mc and mr. The tax is intended to correct an undesirable or inefficient market outcome a market failure, and does so by being set equal to the social cost of the negative externalities.
The macroeconomic effects of lumpsum taxes francois geerolf. The principle of tax fairness by which those with greater ability to pay a tax should pay more tax. These ncert book chapter wise questions and answers are very helpful for cbse board exam. Lumpsum taxes or transfers have income effects that affect consumption of. Consider the scenario, in which a consumer chooses consumption and the fraction of the day she works subject to income constraints, given taxes and prices p. One point is earned for a correctly labeled graph for cablenow, with a downwardsloping demand curve and with the marginal revenue curve below the demand curve. With specific regard to the second, although some other work focusing on the eu countries highlights that tools of fiscal exemptions are more favoured by small and medium farmers i. The lumpsum tax is one in which every citizen pays a single fixed payment. A lumpsum subsidy is given to the firm when a one time subsidy is given to the firm, the subsidy reduces fixed costs. Intermediate microeconomics lump sum principle the. The thinking behind these theorems was laid down in the 1950s after the publication of the arrowdebreu 1954 proof of the existence of general equilibrium. Most important, this tax falls equally on the rich and poor, placing a greater relative burden on the latter.
In the world, there are good reasons why lump sum taxes are rarely used. To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to u. Optimal taxation in theory and practice 060109 final. The lump sum principle the lump sum principle many economic. Choose your answers to the questions and click next to see the next set of questions. Total income and total endowments are fixed in the model, only distribution of initial endowments is changed between the individuals by planner. She was very popular and effective until she pushed for the idea of a so called lumpsum tax. Microeconomics wikibooks, open books for an open world.
Effects of government policies on consumer welfare 4. In this case, the equilibrium consumer price for good 2. A lumpsum tax is a tax that is the same monetary amount for every person. Since optimal tax policy is also a subject of study in microeconomics and public. Measuring one consumers welfare change in dollars, when one price rises, for a simple product utility function 6. Allan m feldman this book provides a concise treatment of the core concepts of microeconomic theory at the intermediate level with calculus.
Ad valorem tax is proportional to the value of the unit, it is a percentage tax rate. Ncert solutions class 12 economics the government budget. The lump sum principle the lump sum principle many. Stephanie schmittgrohe, martin uribe, in handbook of monetary economics, 2010. From the producers perspective, any tax levied on them is just an increase in the marginal costs per unit. A lump sum tax is, therefore, a particular kind of regressive tax, since a fixed amount of money is going to be a higher fraction of income for lowerincome entities and vice versa. Taxation in microeconomics chapter exam instructions. Microeconomics is the study of how decisions are made by consumers and suppliers, how these decisions determine the allocation of scarce resources in the marketplace, and how public policy can influence. Formula chart ap microeconomics unit 2 supply and demand total revenue price x quantity total revenue test p coefficient of price elasticity of demand. National income in closed and open economies anna seim. Comparison net effect a lumpsum subsidy lowers fixed costs. A lumpsum tax is a tax of a fixed amount that has to be paid by every producer regardless of the production level. Lectures notes on economics of taxation hanming fang october 14, 2004 contents. This note provides a basic framework of public finance at the microeconomic level, starting from a general theory of taxation on commodity, income and corporate profits and then extending issues of tax evasion and compliance, and tax reform.
A lumpsum tax accomplishes exactly what the social planner wants. Compare the welfare effects on a consumer between a lumpsum tax and an ad valorem percentage tax on all goods that raise the same amount of tax revenue. Gregory mankiw is professor of economics, matthew weinzierl is assistant. Imposition of a lump sum tax will not affect the firm and industry in the short run. The fundamental theorems of modern welfare economics. These lecture notes were prepared by xingze wang, yinghsuan lin, and frederick jao specifically for mit opencourseware. To illustrate the effect of a tax, lets look at the oil market again. Which of the following curves average fixed cost, average variable cost, average total cost, and marginal cost would shift as a result of the lumpsum tax.
Lump sum taxes are different from both unit taxes and ad valorem taxes since they do not vary with output or price. Dec 15, 2008 an example of an extremely efficient tax is a lump sum tax. In this section, we drop the assumption of lumpsum taxation and replace it with the, perhaps more realistic. Show that this income tax is effectively a lump sum tax. Optimal taxation in theory and practice harvard dash. A lumpsum tax shows clearly the difference between average and marginal tax rates. Firms producing hamburgers look at lump sum tax as extra cost added to fixed costs. A pigovian tax also spelled pigouvian tax is a tax on any market activity that generates negative externalities costs not included in the market price. Fall in tax revenue during the crisis support to nancial sector. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext.
Of course, college teachers have a much more relaxed lifestyle than. The marginal tax rate of a lumpsum tax is equal to zero. The retailing of information media either in a pure digital form or bundled with the conventional form has become increasingly common in product categories such as. The lump sum tax is one in which every citizen pays a single fixed payment. Jan 24, 2014 proof of the superiority of lump sum taxes over specific taxes, part 4. It is a fixed obligation and is equivalent to a fixed cost rather than a variable cost. Because by shifting the price ratio, the tax has caused the consumer to choose a point on the lumpsum budget set that is not the most preferred point on this set. Lecture notes principles of microeconomics economics. A lump sum tax increases firms average fixed cost, and thus average total cost, but has no effect on marginal cost or average variable cost. Sometimes, individual pay tax after selling of some of his holding of other goods. Lump sum taxes limit the amount of deadweight loss associated with taxation. A lump sum tax is a tax that is the same monetary amount for every person. That is, a tax that is levied on the number of units of a specific good that are purchased by marge.
Microeconomics 5th edition by hubbard and o brien solution manual 1 chapters updated apr 06, 2019 01. Economics stack exchange is a question and answer site for those who study, teach, research and apply economics and econometrics. Extensions of consumer theory, taxes in equilibrium, welfare, and. The ordinary income portion is generally the amount from form 1099r, box 2a, minus the amount from box 3 of that form. A lump sum tax accomplishes exactly what the social planner wants. Choose from 500 different sets of chapter 12 tax system microeconomics flashcards on quizlet. Income tax rates and the labor supply curve solved problem 4. A fixed amount of taxes assessed equally on all taxpaying entities regardless of their income level. You can report the ordinary income portion of the distribution on form 1040, line 4b. Economic effects of taxes on a competitive industry. Lump sum taxes economics assignment help, economics. She was very popular and effective until she pushed for the idea of a so called lump sum tax. That is, a tax of some fixed amount that does not correspond with the number of units marge decides to buy of either good. The majority of american families, including the most vulnerable, will benefit financially by receiving more in carbon dividends than they pay in increased energy prices.
Firms producing hamburgers look at lumpsum tax as extra cost added to fixed costs. For example, lump sum taxes, which are based purely on endowments and not behavior, are effi cient but not equitable. In other words, the subsidy has the effect of decreasing costs. Contrasts with a per unit tax, which is levied on every unit of output produced, thus increases in size as output increases. The presentation is intended to help the ap or ib microeconomics teacher easily explain the effects of a lumpsum tax or subsidy or perunit tax or subsidy. The lumpsum subsidy will have no effect on the firms output in the short run because it does not affect mc and mr which determine the quantity of output, and the number of firms wont increase in the short run. The marginal tax rate of a lump sum tax is equal to zero. A short course in intermediate microeconomics with calculus roberto serrano. Proof of the superiority of lump sum taxes over specific taxes, part 4. Exam sem 1, 2011 questions and answers econ20002 studocu. In addition, a lumpsum tax is a tax where everyone pays the same dollar amount in taxes, regardless of income.
The lecture notes are from one of the discussion sections for the course. We will do this by first understanding the nature of the basics concepts of microeconomics, then proceeding to the application of the concepts in specific types of situations. In the world, there are good reasons why lumpsum taxes are rarely used. Ncert solutions class 12 economics the government budget and economy class 12 economics book solutions are available in pdf format for free download.
However it will effect the firm and industry in the long run. Imposition of a profit tax will also effect the firm and industry in the long run. A tax on good x would raise its price, and the utilitymaximizing choice would shift to combination x1, y1. The second theorem of welfare economics microeconomics. When margaret thatcher, during her time as the prime minister of the united kingdom. Browse other questions tagged microeconomics consumertheory or ask your own question. Learn chapter 12 tax system microeconomics with free interactive flashcards. Readings microeconomic theory and public policy economics. An example of an extremely efficient tax is a lumpsum tax. Social cost include private cost and external cost. Analyzing a tax on monopoly price and output duration. A short course in intermediate microeconomics with calculus.
Taxation in microeconomics practice test questions. A lump sum tax is a tax of a fixed amount that has to be paid by every producer regardless of the production level. Lumpsum taxes, such as sales taxes, property taxes on cars and business equipment, and excise taxes, are thought to be regressive since lower income people must apply a higher percentage of their income to the tax. The lump sum principle in the 1980s margaret thatcher was the british prime minister. Lump sum taxes economics assignment help, economics homework. Taxes such as a lump sum tax, a profit tax, or a specific tax, will have an effect on price and output.