Chapter+8+(JEM)+-+The+Cost+of+Taxation


 * __ The Cost of     Taxation

__** Taxes are enacted to raise the government revenue that is necessary for the government to operate and manage the nation's economy and welfare, as we have learned in the previous chapter. However, taxes do influence the market in a negative way, affecting the price and the quantity of the commodities. In this chapter, we discussed about what a kind of cost is resulted due to taxation,what determines this cost, and how it effects the market.

A deadweight loss is a resultant of taxation. The tax wedge created in a supply&demand curve indicates an empty area, which is shaped like a triangle, between the level of quantity due to tax and the equilibrium. The quantity difference between the original equilibrium quantity and the quantity with tax represents the quantity of goods that could have possibly been out for sale on the market if it hasn't been for the tax; and the triangle as a whole represents the lost surplus. This opportunity cost is known as __deadweight loss__. This is a significant loss because although the taxes paid by producers and consumers of the market become governmental revenue, nobody gains anything out of deadweight loss - it just disappears. As a result, the cost of the taxes on producers and consumers is larger than the revenue raised by the government. Not only that, even if the government increase the tax rate extremely high, after a certain point, the tax revenue starts to drop again while the deadweight loss keeps on increasing.
 * Deadweight Loss **

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How the intensity of the deadweight loss is measured can be seen by using the concept of elasticity that we learned in previous chapters. Because the deadweight loss equals to the area within the triangle, when the angle of the curves change, so does the area: The greater the elasticity, the greater the deadweight loss of a tax. Here is powerpoint:

A little review.... Quiz! 1) When Government imposes tax, the economy is not affected by it. True or False? 2)Which curve shows the rise of tax revenue initially but decrease as tax size gets larger? 3)The greater the elasticities of supply and demand, the ________ the deadweight loss of a tax. ( Greater or Smaller) 4)Which of the following creates relatively bigger deathweight loss: Inelastic and Elastic supplies and demands 5)Why tax on a good causes the size of the market for the good to shrink?

1) False, it creates deadweight lose and affects both buyers and sellers. 2) Laffer Curve 3)Greater 4)Elastic Supplies and Demand 5)It is because tax wedges the price buyers pay and price sellers receive, and this wedge makes the quantity sold below the level that would be sold without a tax.