Lecture 1
Incidence
Pre-class
- Watch these two videos from MRU on tax incidence (link 1 and link 2)
Post-class
- Work through the math and graphs from the slides on your own.
- Be sure that you can draw the change in surplus each side of the market faces in response to a tax.
- Then, using the same graphs, relate those changes to the incidence elasticity formula. When you make one side more responsive, what happens to its incidence?
- Do this short practice problem
Key points
- We discuss the difference between statutory and economic incidence in the context of taxation.
- Result 1: Statutory incidence does not determine economic incidence.
- In a market economy, costs or regulations on one side will eventually affect prices and quantity demanded. And these determine the surplus each side gets.
- Result 2: Economic incidence depends on elasticities of supply and demand.
- Relatively inelastic factors bear more of the tax burden.
- Know the formulas and how to compute incidence in the simple case.
Lecture 2
Estimating elasticities + Incidence of the shale boom
Post-class
- Do question 1 from this old problem set on estimating the elasticity of demand for gasoline.
- Submit handwritten solutions to Canvas.
Key points
- The elasticity of demand is a key determinant of many energy and environmental policy outcomes: emissions reductions from a Pigouvian tax, incidence of a any tax or regulation, benefits / costs from tech change/ regulations.
- It’s also tricky to estimate because price and quantity are determined simultaneously in equilibrium.
- Know how to illustrate the simultaneity problem graphically.
- Solutions is to find some reason why price moved around that we know was due only to supply (demand) when estimating demand (supply) elasticities.
- Ignoring demand response leads to a ~ 30% overestimate of the consumer benefits from the shale gas boom.