Ch.8+Application+-+The+Costs+of+Taxation+YD

=DEADWEIGHT LOSS OF TAXATION=

[|*Tax On Buyers & Sellers]

Didn't we do this already? You're right. These are the same graphs from Chapter 6. But why are we going over this again? That is because we are going to add another recipe to the main dish. Before we talk about this new concept, recall that buyers and sellers share the burden of the tax whether the tax is imposed on buyers or sellers. When the tax is imposed on buyers, the demand curve shifts downward by the amount of the tax. When the tax is imposed on sellers, the supply curve shifts upward by the amount of the tax. In the end, the result is the same because the price buyers pay increase, price sellers receive decrease, and the quantity of the goods decrease.

[|*Tax - Washington State University] //(Pc: Price buyers pay, Pe: Price without tax, Ps: Price sellers receive, Qt: Quantity with tax, Qe: Quantity without tax)//

Now, we can simplify the two graphs into one graph just like above. So what happened? Let's summarize. 1. Price buyers pay increased. 2. Price sellers receive decreased. 3. Quantity dropped.


 * [|Tax Revenue/ Deadweight Loss - EconPort]

Hmm... we talked about consumer surplus, the benefit of the buyers, and producer surplus, the benefit of the sellers. Then, what about the government? If we find the revenue by finding the product of the price and quantity, we can find the revenue of the government, which is earned by tax. Say //T// is the amount of the tax and //Q// is the quantity of the good sold. T × Q would be the **tax revenue**. The benefit of the government, the government surplus, would be the tax revenue (TR in the graph).

What is deadweight loss? **Deadweight loss** is the reduction of total surplus that is caused by intervention, such as a tax. These deadweight losses occur because the market is no longer in its equilibrium, where the supply and demand maximizes the total surplus. A tax reduces the incentive to produce and consume for both producers and consumers. This distortion of the incentive reduces the quantity of the good as well as the total surplus.


 * [|Surplus]/ [|Deadweight Loss] - EconModel

Now, we can see the whole picture. With the intervention of the government (tax), we can see that the situation has changed 'a bit'. Consumer surplus and producer surplus has reduced; government revenue has increased; some deadweight loss has occurred. How much is 'a bit', then?

[|*Tax - University of Rochester]

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 * Laffer Curve


 * __Key Concepts__**
 * deadweight loss**: reduction in total surplus because of intervention in the market

Questions 1. Why is tax inefficient in the market? 2. After the tax is imposed, what other kind of surplus emerges?

Answers 1. Because of the deadweight loss. 2. government revenue