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Figure 3.7 shows the original price for milk was $2 per gallon. After
imposition of the tax, the supply curves shift up and to the left.
Consumers pay $2.60 per gallon. Sellers receive $1.60 per gallon after
paying the tax. So sixty cents of the tax is actually paid by consumers,
while forty cents is paid by the milk producers.
The triangle ABC above represents the deadweight loss due to taxation,
which occurs because now there are fewer mutually beneficial exchanges
between buyers and sellers. Deadweight loss stems from foregone
economic activity and is a loss that does not lead to an offsetting gain for
other market participants; it is a permanent decrease to consumer and/or
producer surplus.
Cigarettes are one example where buyers have relatively few options; we
would therefore expect the primary burden of cigarette taxes to fall upon
the buyers.
A subsidy shifts either the demand or supply curve to the right, depending
upon whether the buyer or seller receives the subsidy. If it is the buyer
receiving the subsidy, the demand curve shifts right, leading to an
increase in the quantity demanded and the equilibrium price. If the seller
receives the subsidy, the supply curve shifts right and the quantity
demanded will increase, while the equilibrium price decreases.
A quota limits the amounts of a good that can be produced. If the quota is
greater than what would be produced under normal market conditions,
then it will have no effect. If the amount is less, than the market
equilibrium that is achieved will be at a higher price than what would
occur without the quota, as consumers will be willing to pay more.