12/7/2011 Class40

The additional cost of tax (that is, it cannot be seen on the graph)
(1)You need to hire bureaucrats to implement the tax, but these bureaucrats do not produce anything. And the population of such people and the size of bureau is too big.
(2)The time and effort spent doing and preparing the tax is too big, about 400 billion dollars per year. That's a great waste.
(3)Tax can be misused.

Sales tax: the legal liability of tax is upon the consumers.
The effect of sales tax and excise tax is identical.

The government can decide who they wanna tax on, but they cannot decide who burden the tax to what extent.It depends on the relative elasticity of demand curve and supply curve: the more inelastic the curve is, the more burden it has to bear.


So the more elastic the market of certain good is, the more destructive the tax is to the market transactions. Because people are so sensitive to the change of price that they will quit the market more easily.


Would you support that we should put all the tax only on things that the firms take the whole burden?

Answer: NO. Firms consist of share holders and workers. We shift between the identities of consumers and producers, so the argument doesn't make any sense.

Subsidy can benefit both producers and buyers, and the more inelastic the curve is, the more benefit it can get.

But the subsidy doesn't mean the market will be better off.
Reason: Think about how people respond to incentive and opportunity cost of resources.
When there is a subsidy, the cost of the good is artificially lower, so producers shift resources, which have alternative uses, to make this product. But the low cost is merely an artificial phenomenon, so resources(whether land, workers, capital or time) that could have been used more efficiently are now used to make the product with the subsidy. That's a waste.

Besides, a subsidy may lead producers to overproduce (price now lose the role of signal) and deadweight loss will occur.

So subsidy, like tax, is still an intervention of market, which makes the price no longer the truth teller of market transactions.
Subsidy is mere another way of economic fallacy. What's seen is the prosperity of one field, what's not seen is its damage to fields that could have made the resources more efficiently.