P Q CORRECTING SPILLOVER COSTS D 0 Spillover costs StSt S TAX Overallocation Corrected Q0Q0 QeQe.
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Transcript of P Q CORRECTING SPILLOVER COSTS D 0 Spillover costs StSt S TAX Overallocation Corrected Q0Q0 QeQe.
P
Q
CORRECTING SPILLOVER COSTS
D
0
Spillovercosts
St
S
TAX
OverallocationCorrected
Q0 Qe
P
Q
CORRECTING SPILLOVER BENFITS
0 Q0Qe
D
S
Dt
Subsidy toconsumerincreasesdemand
UnderallocationCorrected
Correcting by Subsidy to Consumers
P
Q
D
0
Subsidy toproducersincreases
supply
St
S’t
UnderallocationCorrected
Qe Q0
Correcting by Subsidy to ProducersCORRECTING SPILLOVER BENFITS
S = Supply of pollution rights
D 2012
Pric
e pe
r pol
lutio
n rig
ht
Quantity of pollution rights500 750 1000
$200
$100
D 2004
Market for Externality Rights
SOCIETY’S OPTIMAL AMOUNTOF EXTERNALITY REDUCTION
MC
MB
Socially optimumamount ofpollution
abatement
0
So
ciet
y’s
mar
gin
al b
enef
it a
nd
mar
gin
alco
st o
f p
oll
uti
on
ab
atem
ent
Amount of pollution abatement
Q1
Apportioning the Tax Burden• Benefits-received principle• Ability-to-pay principle• Types
– Progressive• Average Rate increases as income increases• Ex. Federal Income Tax
– Proportional (Flat)• Average rate remains the same regardless of income• Ex. Corporate Income Tax (35%)
– Regressive• Average rate declines as income increases• Ex. Sales Tax
Incidence and Elasticity
20 40 60 80 100
100
80
60
40
20
0
Percent of Families
Per
cen
t o
f In
com
e Perfect Equality
CompleteInequality
Lorenz Curve (actual distribution)
Area betweenthe lines shows
the degree ofincome inequality
Lorenz curveafter taxes and
transfers
THE LORENZ CURVE
