Chapter+8+Application+-+The+Costs+of+Taxation.JAKS

=Chapter 8. Application - The Costs of Taxation =





 Definitions

 *  Deadweight loss: the fall in total surplus that results from a market distortion, such as a tax

 Learning Objectives

 * How a tax affects market participants
 * Deadweight losses and the gains from trade
 * Determinants of deadweight loss
 * Relationship between deadweight loss and tax revenue


 * 1. The Deadweight Loss of Taxation**

When a tax is levied on buyers, the demand curve shifts downward by the size of the tax; when it is levied only curve shifts upward by that amount. Which curve shifts depends on whether the tax is levied on sellers (the supply shiftss) or buyers (the demand curve shifts).



1) The tax revenue: the size of the tax times the quantity. 2) Deadweight loss: a tax on a good reduces consumer surplus (by the area B+C) and producer surplus (by the area D+E) Because the fall in producer and consumer surplus exceeds tax revenue (area B+D), the tax is said to impose a deadwieght loss(area C+E)
 * Basically, area C + D in the right graph located above shows the deadweight loss**

1). When a tax raises the price to buyers and lowers the price to sellers, however, it gives buyers an incentive to consume less and sellers an incentive to produce less than they would in the absence of the tax. 2). The gains from trade - the difference between buyers' value and sellers' cost - are less than the tax. The deadweight loss occurs because surplus is lost when tax discourages mutually advantageous trades.
 * In the real world, deadweight loss occurs because 1). losses of buyers and consumers are greater than revenue earned by government and 2). tax prevents buyers and sellers from realizing some of the gains from trade.**


 * 2. Tax and elasticity**

[[@http://www.flatworldknowledge.com/pub/1.0/principles-microeconomics/43982|]]


 * The great the elasticies of supply and demand, the greater the deadweight loss of a tax.**


 * 3. Size of the tax**

1) small tax has a small deadweight and small revenue 2) medium tax has larger deadweight and larger revenue 3) large tax has large deadweight loss, but tax raises small amount of revenue

As tax grows larger, the tax revenue first rises, then falls. (the laffer curve)**
 * As tax grows larger, deadweight loss grows as well.

Conclusion Summary of all this in **60** seconds Ready Set Go!!

media type="youtube" key="4j9zglAnyXg" height="344" width="425"

&

media type="youtube" key="4cWoDJcgbHE" height="344" width="425"

 = = =<span style="color: #00ff00; display: block; font-family: Impact,Charcoal,sans-serif; font-size: 42px; text-align: center;"> = = =

=**<span style="color: #00ff00; display: block; font-family: Impact,Charcoal,sans-serif; font-size: 42px; text-align: center;">THANK YOU **=



**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Review Questions **
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">Inefficiency exists in an economy when a good is <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> If a tax is imposed on a market with elastic demand and inelastic supply <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> The benefit received by the government from a tax is measured by <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Total surplus with a tax is equal to <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Taxes cause deadweight losses because <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Answers8.Jaks
 * 1) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">being produced with less than all available resources
 * 2) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">not distributed fairly among buyers
 * 3) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">not being produced by the lowest-cost producers
 * 4) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">being consumed by buyers who value it most highly
 * 1) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">buyers will bear most of the burden of the tax
 * 2) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">sellers will bear most of the burden of the tax
 * 3) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">the burden of the tax will be shared equally between buyers and sellers
 * 4) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">it is impossible to determine how the burden of the tax will be shared
 * 1) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">deadweight loss
 * 2) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">tax revenue
 * 3) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">equilibtrium price
 * 4) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">total surplus
 * 1) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">consumer surplus and producer surplus
 * 2) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">consumer surplus minus producer surplus
 * 3) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">consumer surplus, producer surplus, and total surplus
 * 4) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">consumer surplus, producer surplus, and tax revenue
 * 1) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">they transfer purchasing power to the government which always wastes money
 * 2) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">they prevent buyers and sellers from realizing some of the gains from trade
 * 3) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">marginal buyers and sellers leave the market causing the quantity sold to fall
 * 4) <span style="border-collapse: separate; color: #000000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">both b and c are correct

**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Work Cited **
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> image: http://upload.wikimedia.org/wikipedia/commons/0/02/Death.jpg image: http://images.google.co.kr/imglanding?q=tax&imgurl=http://www.kimrichter.com/Blog/uploaded_images/Tax-Time-Comfort-In-Langley-Township-copy-706812.jpg&imgrefurl=http://www.kimrichter.com/Blog/2008_02_01_archive.html&usg=__IETq0vcAOKVisyH9t42aHJS4WMA=&h=432&w=504&sz=103&hl=ko&um=1&tbnid=6GC_BuYUa5Hb4M:&tbnh=111&tbnw=130&prev=/images%3Fq%3Dtax%26ndsp%3D18%26hl%3Dko%26client%3Dfirefox-a%26rls%3Dorg.mozilla:en-US:official%26sa%3DN%26start%3D36%26um%3D1%26newwindow%3D1&ndsp=18&client=firefox-a&rls=org.mozilla:en-US:official&sa=N&start=34&um=1&newwindow=1#tbnid=AQw9J_E-l9tbzM&start=44 Video: http://www.youtube.com/watch?v=4j9zglAnyXg Video:http://www.youtube.com/watch?v=4cWoDJcgbHE questions: Barons 2007-2008