8-1

8-1 Legal incidence- the individual or group that is legaly responsible for paying a tax to the government Economic incidence- the individual or group that bears the real burden of the tax and the individual or group whose real income is reduced by the tax Excess burden or welface cost- the effect of a tax on economic efficiency Average tax rate- indicates the individual’s total tax liability as a percentage of an appropriate index or benchmark Marginal tax rate- indicates the percentage chance in your tax liability when the benchmark changes Progressive tax- when the average tax rate increases when the benchmark increases Proportional tax- when the average tax rate remains constant when the benchmark increases Regressive tax- when the average tax rate decreases when the benchmark increases

8-5a Supply and demand are both highly elastic. When supply is highly elastic, suppliers pay a smaller share of the tax. When demand is highly elastic, consumers pay a smaller share of the tax. These two would offset and the supplier and consumer would split the cost, so the price of beer would go up but not by the full $0.60. The amount of beer sold in Tallahassee would decrease as well as the number of beer sellers. 8-5b The amount of beer sold and the number of beer sellers outside of Tallahassee will increase because people from Tallahassee will go outside the city to sell and purchase beer. 8-5c Tallahassee is a college town with many alcoholic beverages to choose from. If beer is taxed, citizens will simply drink something else. 8-5d The economic incidence is shared by all suppliers and consumers, because every bottle is taxed $0.60. The welfare cost is relatively large because both the supply and demand curves are highly elastic.