Chapter+8+-+The+Costs+of+Taxation+CDJ

=Application: The Costs of Taxation = In this chapter, we look at the effects of taxes on welfare, and on the economic well being of people in a market. Let’s start with the most obvious. The government puts taxes on people to raise revenue, which is used for public goods and services.

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The Deadweight Loss of Taxation [[image:STA53712.JPG width="406" height="310" align="right"]]
In Chapter 6, we learned that it does not matter whether the tax is placed on buyers or sellers because they both end up with the same outcome – buyers pay more and sellers receive less. They are both unhappy. Now, let’s look at it graphically. When tax is placed on buyers, the demand curve shifts down according to the size of the tax. When tax is placed on sellers, the supply curve shifts up by the size of the tax. When you look at it in the end, you can see that they both face the same burden in spite of who the tax is levied on.

In chapter 6, we drew the graph by shifting the demand and supply curve to show the effects of taxation. In this chapter, we make your life a whole lot easier by not bothering to shift any curves!

Tax creates a wedge between the price, which buyers pay, and sellers receive. This reduces the quantity sold below the equilibrium quantity. It makes the market smaller!

Listen to the podcast below to find out how a tax affects market participants! 

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As you can see, the height of the rectangle is the size of tax and the width of the rectangle is the quantity sold. If you multiply these two together, you get tax revenue!

Dead Weight Losses and Gains + Losses from Trade First of all, what is a deadweight loss? It is the decline in total surplus due to market "distortions" such as tax.

Listen to the podcast to find out more!

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The Determinants of Deadweight Loss
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The last picture got replaced, because it is suppose to be an originally drawn graph

Deadweight Loss and Tax Revenue as Taxes vary

When a government imposes more tax, it increases the revenue but creates a bigger dead weight loss. Tax revenue increases then decreases once it reaches its point. Remember that dead weight losses rise more quickly than the tax revenue.

MOREOVER, Dead weight losses** continually increase ** as as tax increases. So, it has an increasing curve.

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This is a handout of powerpoint from the Mankiw website :


SUMMARY: **
 * 
 * Taxes reduces the welfare of both buyers and sellers of the good
 * Taxes cause the deadweight loss.
 * Taxing cause the total surplus to fall: consumer surplus decreases and producer surplus decreases
 * Increase in tax distorts the incentives more, and this will cause the deadweight loss to increase more as well
 * In other words, increase in deadweight loss will cause the increase in tax size
 * As the tax size increases, the tax revenue increase but decreases back again

1. Explain the Laffer Curve
 * <span style="font-size: 140%; color: rgb(26, 100, 193);">Questions For Review **

When a government imposes more tax, it increases the revenue but creates a bigger dead weight loss. Tax revenue increases than decreases once it reaches its point. Remember that dead weight losses rise more quickly than the tax revenue. Dead weight losses continually increase as as tax increases.

<span style="font-size: 130%; color: rgb(219, 110, 26);">2. What determines the size of the dead weight loss Price elasticities of the supply and demand determine the size of dead weight loss. Greater elasticities of supply and demand means greater deadweight loss