Chapter+8+Application+The+Costs+of+Taxation+(Joon,+Scott,+and+Steven)

Key Terms:

 * Deadweight Loss:** the fall of total surplus from a market distortion.

Intro: Everyone hates taxes. There is a reason! Taxes discourage economic activity. Let's examine how taxes effect the market.

T=size of tax Q=quantity of the good sold Total tax revenue= TxQ Look at the graph below!

P1 is the represents the tax. The height of the tax matters, but who(producer or consumer) gets more tax does not matter. Either way both sides get taxed.



A is government revenue and B is deadweight loss. (Graph Below) Credits: http://www.econmodel.com/classic/terms/deadweight_loss.htm

Without tax, the consumer and producer surplus both rise. There is no deadweight loss. With tax, economic activity is discouraged through distorted incentives and there is deadweightloss.

Determinants of Deadweight Loss

 * Rule: the greater the elasticities of supply and demand, the greater the deadweight loss of a tax.
 * the larger will be the decline in equilibrium quantity and,
 * the greater the deadweight loss of a tax.





Credit: http://74.125.153.132/search?q=cache:RoHXZjRn41IJ:pubfin.nccu.edu.tw/faculty/jackwu/ETP%2520Econ%2520Lecture%2520Note%25208.ppt+tax+distortions+and+elasticities&cd=1&hl=en&ct=clnk&client=firefox-a

Deadweight loss and Revenue as Taxes Vary
Let's see the effects of changes in deadweight loss when taxes are changed. For the small tax, tax revenue is smaller; for the medium tax, tax revenue rises; and for the large tax, tax revenue shrinks again.

With each increase in the tax rate, the deadweight loss of the tax rises even more quickly than the size of the tax. As the size of the tax continues to rise, tax revenue begins to fall because the higher tax reduces the size of the market. Image Credits: http://74.125.153.132/search?q=cache:noHO7mfZaBQJ:www.sfu.ca/~djacks/courses/Principles/Lectures/ECN%2520103%2520-%2520Ch%25208%2520%28Taxes%29.ppt+deadweight+loss+and+tax+revenue+vary+with+the+size+of+a+tax&cd=7&hl=en&ct=clnk&client=firefox-a

The greater the tax, the greater the deadweight loss. (Shown in three graphs above)

Image Credits: http://74.125.153.132/search?q=cache:noHO7mfZaBQJ:www.sfu.ca/~djacks/courses/Principles/Lectures/ECN%2520103%2520-%2520Ch%25208%2520%28Taxes%29.ppt+deadweight+loss+and+tax+revenue+vary+with+the+size+of+a+tax&cd=7&hl=en&ct=clnk&client=firefox-a
 * RELATIONSHIP BETWEEN DEADWEIGHT LOSS AND TAX**

Conclusion: Societies can't exist without taxes. Although taxes are bad because they cause deadweight loss, taxes are need to run the roads, parks, police and national defense. Taxes not only take resources from the market to the government, but taxes also distort the incentives of the market. .media type="youtube" key="tUSlrQ_4Gw4" height="344" width="425"