$10,000 Pencils

Quick thought experiment:

Congress, having realized the importance of pencil-ownership, passes the "Americans with Pencils Act" (APA). It's goal is to promote the ownership of pencils by helping to make them more affordable. The bill creates tax incentives for Americans who purchase pencils. Essentially, anyone purchasing a pencil is given a $10,000 tax rebate for EACH pencil purchased in that year, starting NOW.

a) What happens next?
b) Does the bill achieve its stated goal?

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Let me think. Subsidy of

Let me think. Subsidy of pencil consumption. That increase the demand for pencils. Hold on--let me draw the graphs.

a) Quantity of pencils demanded goes up. Price of pencils goes up--by quite a bit I imagine.

If the price goes up, I don't think that qualifies as making the good more affordable.

b) No.

How'd I do?

pencils become incredibly

pencils become incredibly scarce. the federal budget/defiecit grows by a hefty amount, and the value of the dollar plunges dramatically. thats my briefly considered take on the matter

I'll answer later. First I

I'll answer later. First I have to run out and buy all the pencils in Peoria. Maybe some of the surrounding towns, too. Oops, not so fast! First I have to put all of my 401(k) into pencil manufacturers. Or tulip bulbs. Whatever.

The price shouldn't go up

The price shouldn't go up too much. Nobody in my extended family would purchase more than 5 or 6 extra pencils. Some people, not paying any income tax, would purchase 0 extra pencils. The very rich might purchase a few thousand, but their numbers are small.

All in all I'd say there would be an extra 500 million pencils purchased per year, an increase of about 20% over the current US pencil market. I'm assuming that the supply of pencils is fairly elastic, so I'd estimate that the price of the average pencil would increase by some percentage less than that.

Although this policy increases the price of pencils, it may not be counterproductive. Ceteris paribus it does increase the amount of pencils consumed. If increased pencil consumption is our goal, then the policy can be said to work with one reservation:

-Those that can't afford pencils now (the poor) have the lowest tax liabilities, and thus benefit the least from the program (both in taxes saved and in increased pencil consumption).

So, I guess the right way to increase pencil consumption is with direct government pencil subsidies to the poor, and not general tax breaks.

There is a windfall profit

There is a windfall profit to pencil producers. Lets say the price of pencils increases 10%, and the quantity produced and sold increases by 20%, then the increase in producer profits will be (1.1*1.2)-1=.32 or 32%.

The stock price of pencil makers will shoot up abruptly as it adjusts to their new expected level of profitability. However, it should soon level off as investors price the new profitability expectations into their bids. Of course, this assumes congress will decide to leave the pencil industry alone in the future, which becomes a somewhat less certain proposition.

On the flipside, the economy saves a few billion dollars a year in tax preparing accountants, since we'd all likely buy pencils until our tax burden is erased.

However, if this is only a tax break on personal income tax, then we are not realizing potential gains from eliminating the vast corporate tax preparing sector.

My friend, Jacob, the

My friend, Jacob, the economics major.

Show off.

Jacob, Wouldn't pencil

Jacob,

Wouldn't pencil manufacturers raise the price of pencils much more than 10%? They know that a significant portion of the population values pencils at slightly less than $10,000.

Of course, perhaps consumer's willingness to pay is not enough to change things much, if the pencil market is significantly competitive, if barriers to entry are significantly low, and if producers, no matter how much they would like to raise prices to capture part of this potential consumer surplus, are stuck charging just above marginal cost.

Andy, How much money do you

Andy,

How much money do you draw? You shouldn't need to purchase all the pencils in Peoria to erase your tax liability. Try to sharpen your analysis.

If they really did pass the law, you wouldn't want to take your time about revising your numbers. You'd really wanna get the lead out. You might try to graphit. That would give you a sketch of a plan for future action. Piece of advice No.2, be thorough with your numbers. Real mechanical.

Peace,

Jacob

Micha, The marginal

Micha,

The marginal consumer still values a pencil at a quarter (or whatever). The demand curve comes in at $10,000 for the first 500 million pencils sold, and then swoops down to the original market demand curve to meet the supply curve at a price and quantity somewhat above the initial market quantity. The ability of producers to expropriate any of the additional consumer surplus created by the policy depends, as you say, upon the degree of oligopoly power possessed by the firms. I assumed easy entry for producers into the pencil market.

Here's an interesting extention: the amount of extra pencils sold wouldn't be the full 500 million needed to erase all personal income tax liability because many of the people buying pencils for tax rebate purposes would have bought pencils anyway. The pencils worth $10,000 are substituting for some pencils that already would have been exchanged in the market place. This lessens the effect of the pencil rebate.

On the flipside, the increase in real incomes raises the demand for all goods, which would tend to raise the price and quantity of pencils sold. Interestingly, since this effect touches all markets in the same way, it doesn't create the same allocation distortions that the specific incentives facing the pencil market does.

I know it's not the blog

I know it's not the blog policy, but can we ban him? Or at least keep him from commenting?

Nein!! :lipssealed:

Nein!! :lipssealed:

Jacob, I was actually

Jacob,

I was actually imagining it as a tax-credit like the "child tax credit" where you can get a $10,000 check from the gorvernment for each pencil purchased, no limit, even if you had no tax liability. Re-reading it, that's probably not what he meant, but it would be an entirely different sort of mess, and in that situation I wouldn't want my money in anything but gold, pencils, or pencil factories.

One obvious effect would be

One obvious effect would be that all other taxes would have to rise to cover the erased income-tax revenues, making everything in the country more expensive, not just pencils. Either that or the government, in order to fund this pencil subsidy, would run up public debt even faster. At some point they cease to be able to sell bonds to the world public, the government's debt rating tanks, it takes the rest of the world's economy with it, we go through a painful decade or two of ruin and readjustment, etc.

Jacob,

Your third comment, in response to Andy, was both very insightful and physically painful. :dizzy:

"Your third comment, in

"Your third comment, in response to Andy, was both very insightful and physically painful."

You might say it was pointed?

"You might say it was

"You might say it was pointed?"

To be blunt, yes.

"One obvious effect would be

"One obvious effect would be that all other taxes would have to rise to cover the erased income-tax revenues, making everything in the country more expensive, not just pencils. Either that or the government, in order to fund this pencil subsidy, would run up public debt even faster. At some point they cease to be able to sell bonds to the world public, the government’s debt rating tanks, it takes the rest of the world’s economy with it, we go through a painful decade or two of ruin and readjustment, etc."

You leave out a possibility: the government could get drastically cut its budget.

Hahahaha!

Hahahaha!

"a) What happens

"a) What happens next?"

Congress quickly moves to close the "Pencil Loophole".

"b) Does the bill achieve its stated goal?"

The representatives of the American Pencil Manufacturers' Council will discuss that question this weekend on Meet The Press.

Will I still get the tax

Will I still get the tax credit if I shove the pencil up the ass of my congressman?

Well, I cedar economists

Well, I cedar economists have been over the issue rather thoroughly.  I suppose there's no room for us ferrule sorts like engineers to say anything insightful, so I'll just o-pun the door and slink out.

You leave out a possibility:

You leave out a possibility: the government could get drastically cut its budget.

In my own defense, so, usually, does the government. In other words, while your word "possibility" is technically accurate, it is misleading.

"Ferrule" sorts?

"Ferrule" sorts?

Wel there would probably a

Wel there would probably a shortage of pencils. People would begin selling pencils on e-bay to cash in on the entire craze. Certain "advocates" would whinge that the poor can not get pencils so they can take advantage of the scheme.

Explaining a pun just

Explaining a pun just murders the humor. :behead: