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McGraw-Hill/Irwin
infeasible.
Three commodities:
Good X, Y, and leisure
Prices PX, PY, and w.
work.
goods X and Y.
Figure 14.1
is approximately: X.
The marginal tax revenue raised is
approximately: X1.
Therefore the marginal excess burden per
X:
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13
14
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depends on:
How much society cares about
equity
Extent to which consumption
patterns of rich and poor differ
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17
14.2.
Continually decreasing average
costs
Marginal cost lies everywhere below
average cost
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Figure 14.2
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Figure 14.3
Z *.
Key problem is that at this quantity, price is
22
but ZA<Z*.
Marginal cost pricing with Lump
Sum Taxes: Set P=MC, provide Z* at
a loss, and finance it with a lump
sum tax.
Assumes such a tax is available
Equity considerations who uses the
good?
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accounted for.
25
26
Figure 14.4
and t.
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problems:
Allowing for modest amount of
substitution between leisure and
income leads to income tax rates
considerably less than 100%.
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Tax evasion
Tax avoidance
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Tax Evasion
Tax evasion is failing to pay legally due
taxes.
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Tax Evasion
Suppose person cares only about
Tax Evasion
Figure 14.5 shows that optimal
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Figure 14.5
Tax Evasion
Ignores a number of real-world
aspects:
Psychological costs of cheating
Risk aversion
Work choices
Probabilities of audit
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36
User Fees
Optimal Income Taxation
Tax Evasion