Chapter+8+APPLICATION+THE+COSTS+OF+TAXATION

**Application: The Costs of Taxation**
====Taxation is indeed a predominant part of managing a society. It definitely provides us citizens with good transportation system, government, protection...etc. However, the thing about taxation is that it causes **DEADWEIGHT LOSS** !====


====The tax revenue is the rectangular box labeled tax revenue. Tax revenue is =T* Q      ====

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You can see that the QUANTITY fell from Qo to Q1. THE PRICE ON THE OTHER HAND ROSE to the place marked NEW PRICE. THUS, the whole taxation system reduces the efficiency level of economy. The __**reason**__ for a quantity drop is fairly simply because it causes buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes.=====

THE DETERMINANTS OF THE DEADWEIGHT LOSS
Well, the thing about deadweight loss can be big or small according to the price elasticities. 

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The reason is simply. Basically, if a product is inelastic, no matter how much taxation is put onto the price, you won't neglect buying something that is so necessary to you thus, the quantity of that product will NOT decline. THUS, this is why the deightweight loss is not increased alot. (the bigger the Quantity difference, after and before the taxation, the bigger the deadweight loss)=====

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BUT ONE THING TO NOTE IS THAT BOTH DEMAND AND SUPPLY CURVE does effect the size of deadweight loss. For instance is the demand curve is elastic, the DWL (dead weight loss) is large while if the supply curve is inelastic, the DWL is small=====

Nevetheless, the amount of deadweight loss always increases infinitely as the tax size increases.
VISUAL

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LAFFER CURVE

One economist called Authur Laffer suggested that a cut in tax rates could riase tax revenue and indeed his suggestion was beneficial. The reason for this is because the lower tax rates would give people the proper incentive to work, which would raise economic well-being and perhaps even tax revenue.

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QUIZ! 1. Modern society can exist without government. True of False 2. What are the two price the society pay because of taxes? 3. Define deadweight loss, 4. Does Deadweight loss increases, then decreases as tax size increase? True or False 5. When tax revenue first rises and then falls as tax size increases, it is called?

Answer. 1. False 2.Taxes transfer resources from participants to the government and also alter incentives and distort market outcomes. 3. the fall in total surplus that results form a market distortion, such as tax 4. False 5. Laffer curve

=Summary= A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus. 