CHAPTER+8+.+APPLICATION+-+THE+COSTS+OF+TAXATION+;)

=**The Deadweight Loss of Taxation **=

> the price that a buyer pays > the price the seller receives. 
 * **REMEMBER** ! It does not matter who a tax is levied on, because __buyers and sellers are likely to share in the burden of the tax__.
 * If there is a tax on a product,

How a Tax Affects Market Participants

 * We can measure the effects of a tax on consumer  by examining the change in consumer surplus . Similarly, we can measure the effects of the tax on producers  by looking at the change in producer surplus .
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">The government gets total tax revenue of T x Q. If the tax revenue is used to provide goods and services to the public, then the benefit from the tax revenue must not be ignored.



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 * <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive; font-size: 130%;">Deadweight loss <span style="font-family: 'Comic Sans MS',cursive; font-size: 130%;">: the __fall in total surplus__ that results from a market distortion, such as __tax__.

<span style="font-family: 'Comic Sans MS',cursive;">Why are deadweight losses caused?

 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">__Taxes__ cause deadweight losses because they __prevent buyers and sellers from benefiting from trade__.
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">This occurs because the __quantity of output declines.__
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">The deadweight loss is equal to areas C and E. (look at the graph above!)

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=<span style="background-color: #c0c0c0; color: #800080; display: block; font-family: 'Comic Sans MS',cursive; font-size: 130%; text-align: center;">The Determinants of the Deadweight Loss =

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 * <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive; font-size: 124.8%;">The price elasticities of supply and demand <span style="font-family: 'Comic Sans MS',cursive; font-size: 124.8%;"> will determine the __size of the deadweight loss__ that occurs from a tax.
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">Given a stable demand curve, the <span style="background-color: #f4bde1; font-family: 'Comic Sans MS',cursive; font-size: 120%;">deadweight loss is LARGER when supply is relatively ELASTIC <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">.

**MEMORIZE THIS!**

 * INELASTIC SUPPLY: SMALL DEADWEIGHT LOSS
 * ELASTIC SUPPLY: LARGE DEADWEIGHT LOSS

<span style="font-family: 'Comic Sans MS',cursive; font-size: 130%;">
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">Given a stable supply curve, the <span style="background-color: #f4bde1; color: #000000; font-family: 'Comic Sans MS',cursive; font-size: 120%;">deadweight loss is LARGER when demand is relatively ELASTIC <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">.

**MEMORIZE THIS!**

 * INELASTIC DEMAND: SMALL DEADWEIGHT LOSS
 * ELASTIC DEMAND: LARGE DEADWEIGHT LOSS

=<span style="background-color: #c0c0c0; color: #800080; display: block; font-family: 'Comic Sans MS',cursive; font-size: 130%; text-align: center;">Deadweight Loss and Tax Revenue as Taxes Vary =

<span style="font-family: 'Comic Sans MS',cursive; font-size: 130%;">
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">As taxes ➚, the deadweight loss from the tax ➚.
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">In fact, as taxes ➚, the deadweight loss ➚ more quickly than the size of the tax.
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">As the tax ➚, the level of tax revenue will eventually ➘.

==<span style="font-family: 'Comic Sans MS',cursive; font-size: 130%;"> <span style="font-family: 'Comic Sans MS',cursive;">The Laffer Curve and Supply-Side Economics == <span style="font-family: 'Lucida Console',Monaco,monospace; font-size: 130%;">
 * <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive; font-size: 120%;">Laffer Curve <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">: the __relationship between the size of a tax and the level of tax revenues__
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 124.8%;">In the 1980s, economists believed that a drop in tax rates could lead to an increase in tax revenue for the government.
 * <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">We __cannot predict how much tax revenues will change in response to a change in tax rates just by looking at the tax rates__ themselves. The government must understand how a change in tax rates will affect individual's behavior.

=<span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">Key Terms! = =<span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;"> =
 * <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive; font-size: 130%;">Deadweight loss <span style="font-family: 'Comic Sans MS',cursive; font-size: 130%;">: the __fall in total surplus__ that results from a market distortion, such as __tax__.
 * <span style="color: #ff0000; font-family: 'Comic Sans MS',cursive; font-size: 120%;">Laffer Curve <span style="font-family: 'Comic Sans MS',cursive; font-size: 120%;">: the __relationship between the size of a tax and the level of tax revenues__

<span style="font-family: 'Courier New',Courier,monospace; font-size: 130%;">BIB: http://www.homefinancetip.com/blog/wp-content/plugins/wp-lifestyle/cache/22451_z203338947.gif