Chapter+Eight

=__**Tax and Deadweight Loss**__=

Summary:
This chapter deals with tax and deadweight loss. It considers how taxes levied on markets may affect the overall well being of the market. It also deals with how tax can distort incentives which creates deadweight loss, which is a market failure.

Key Terms:
deadweight loss: the fall in total surplus that results from a tax: reduced well-being of the society due to market distortion

Economists think about how taxes affect economic well being. To understand this, we must consider tax's impact on welfare of the consumers and producers as well as government revenue. A good thing to keep in while reading this chapter is that it does not matter who burdens the tax, the producers or consumers. However the supply and demand curve shift downward and upward depending on the size of the tax. //These graphs explain how deadweight loss is created from tax and where it is on the graph.//

How Tax Affects the Market Participants
In order to measure the gains and losses of a good from tax we must use the tools of welfare economics. Keep in mind that tax affects buyers, sellers, and government and how it affects each one. Surplus is profit, therefore a buyer’s benefit is called the consumer surplus, and the sellers’ benefit is called the producer surplus.

So, the consumer surplus is above the consumer So, the producer surplus is under the equilibrium line but above the supply line.
 * Consumer surplus** is the amount of willingness to pay of buyers – the amount actually paid for the good.
 * Producer surplus** is the amount seller receives from good – the actual cost.

The third party is the government, the group that receives the benefit of the tax. Tax revenue is measured as the size of the tax times the quantity of the good that is sold (T x Q). However tax is not levied for the government but for the group that it is going to be spent for. //These two graphs show the different surpluses and where they are located on the graph. The difference between when there wasn't tax and when there is tax.//

Welfare without Tax
When there is not tax, the price is set on where the supply and demand line meet, otherwise known as the equilibrium price.

Welfare with tax
When there is tax, the tax revenue appears decreasing the amount of producer and consumer surplus. It will increase the price of the good and decrease the amount that sellers receive.

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 * Dead Weight Loss** is the loss from the total surplus when tax is put on the market. The loss that the buyers and sellers suffer from the tax will be greater than the tax revenue. Dead weight loss is the money that disappears from the market.

Tax distortions and Elasticity
- When the supply is inelastic the dead weight loss is small - When the supply is elastic the dead weight loss if big - When the demand is inelastic the deadweight loss is small. - When the demand is elastic the deadweight loss is big.


 * Laffer curve** is the idea that as size of the tax increases the deadweight loss increases with it, however as the size of the tax increases the revenue will rise as well but after a while it will begin declining.

1. What happens when tax is put on the market?
 * Practice Questions:**

2. Is the DWL greater or the Tax Revenue?

3. How does the elasticities affect the Deadweight loss?

1. When tax is put into the market it decrease the amount of producer and consumer surplus. However it also increase the price of the good but decreases the amount that sellers receive. 2. Deadweight loss is greater than the Tax revenue. 3. Elasticity is what determines the size of the deadweight loss. If inelastic the dwl is small, if elastic the dwl is larger.
 * Answers**: