Step+8.+The+costs+of+Taxation-+Sarah

=The Costs of Taxation = 

__**Introduction**__ In Step 6, you learned how tax raises the price paid by buyers and lowers the price sellers receive. In this chapter, we'll learn the effect of tax in details. Get ready to learn some more taxation graphs!:)

__**What We Will Learn**__ -deadweight loss of the tax -larger elasticity and larger deadweight loss -tax revenue

__**Key Terms**__


-deadweight loss: decrease in total surplus in the market caused by market distortion such as tax

 __**Topics**__

 1) The Deadweight Loss of Taxation
i. When a tax is levied on buyers, demand curve shifts downward by size of tax ii. When it is levied on sellers, the supply curve shifts upward by that amount i. Quantity sold falls below the level that would be sold without a tax ii. Tax on a good causes the size of the market for the good to shrink
 * It does not matter whether a tax on a good is levied on buyers or sellers of the good-- the price paid by buyers rises, and the price received by sellers falls
 * Tax places a wedge between the price buyers pay and the price sellers receive

2) Effects of Tax
 How a Tax Affects Market Participants i. Tax Revenue • T = the size of the tax • Q = the quantity of the good sold • T x Q = the government’s tax revenue

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How a Tax Affects Welfare: i. Changes in Welfare • Tax makes buyers and sellers worse off and the government better off • Change in Total Welfare = Change in Consumer Surplus + Change in Producer Surplus + Change in Tax Revenue • The losses to buyers and sellers from a tax exceed the revenue raised by the government • A deadweight loss is the fall in total surplus that results from a market distortion, such as a tax • Taxes distort incentives and cause markets to allocate resources inefficiently

 3) Deadweight Losses and the Gains from Trade
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> i. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade

The Determinants of the Deadweight Loss i. The magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price ii. That, in turn, depends on the price elasticities of supply and demand <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">iii.The greater the elasticities of demand and supply:
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">When supply is relatively inelastic, the deadweight loss of tax is small
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">When supply is relatively elastic, the deadweight loss of tax is large
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">When demand is relatively inelastic, the deadweight loss of tax is small
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">When demand is relatively elastic, the deadweight loss of tax is large
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">The larger will be the decline in equilibrium quantity and,
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">The greater the deadweight loss of a tax

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> 4) Size of Tax Affects Deadweight Loss and Tax Revenue
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Deadweight Loss and Tax Revenue As Taxes Vary
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">For a small tax, tax revenue is small
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">As the size of the tax rises, tax revenue grows
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">But as the size of the tax continues to rise, tax revenue falls because the higher tax reduces the size of the market
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">As the size of a tax increases, its deadweight loss quickly gets larger
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">By contrast, tax revenue first rises with the size of a tax, but then, as the tax gets larger, the market shrinks so much that tax revenue starts to fall

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">__**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> Conclusion **__ Make sue you know how tax creates deadweight loss and how it affects the well fare of the economy!!:)

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">__**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;">Quiz **__ Define change in welfare. How do you calculate it? -<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Change in Total Welfare = Change in Consumer Surplus + Change in Producer Surplus + Change in Tax Revenue

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"><span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> __**<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> Sources **__ Mankiw, Gregory N. //Principles of Microeconomics//. 4th ed. Print. http://www.exploregenealogy.co.uk/images/1586.jpg