Chapter+8+Application+The+Costs+of+Taxation+JBS

=**Chapter 8 Application The Costs of Taxation JBS **=

**Key Terms **
**Deadweight loss **: Reduction in total surplus because of intervention in the market

**Deadweight Loss of Taxation**


When the //tax is levied on buyers, the demand curve shifts downward by the size of tax//. Tax levied on sellers, supply curve shift upward by that amount.


 * Tax places a wedge between the price buyers pay and the price sellers receive.
 * Tax on a good causes the size of the market for the good to shrink.

Gains and losses from a tax on a good
 * Benefit of buyers is measured by consumer surplus.
 * Benefits of sellers is measured by producer surplus
 * Benefits of government is measured by the tax revenue

**Tax's effects on welfare**
Without a tax, the price and quantity are found at the intersection of the supply The tax revenue equals zero, because there is no tax (:

Welfare with tax's consumer surplus and the producer surplus decreases, and deadweight loss is created. Thus total surplus is decreased.

The losses to buyers and sellers from a tax > the revenue raised by the government Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.

**Determinants of Deadweight Loss**
The key factors that determines the price elasticities of supply and demand. Price elasticities -> how much the quantity supplied and quantity demanded respond to changes in price. ( from chapter 5)  In conclusion, a tax has a deadweight loss because it induces buyers and sellers to change their behavior. Greater the elasticities of supply and demand, the greater the deadweight loss of a tax.
 * Deadweight loss is larger when the supply curve is more elastic.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Tax increases the payment for the consumers, which lowers demand.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Tax decreases the payment for sellers, so they produce less.



<span style="font-family: Tahoma,Geneva,sans-serif;">__A. **Inelastic Supply**__ When Supply is relatively inelastic, the deadweight loss of a tax is small __B. **Elastic Supply**__ When supply is relatively elastic, the deadweight loss of a tax is large



<span style="font-family: Tahoma,Geneva,sans-serif;">__C. **Inelastic Demand**__ When demand is relatively inelastic, the deadweight loss of a tax is small __D. **Elastic Demand**__ When demand is relatively elastic, the deadweight loss of a tax is large

<span style="color: #800080; font-family: Tahoma,Geneva,sans-serif;">**Tax Revenues**
<span style="font-family: Tahoma,Geneva,sans-serif;">Tax revenue is the amount of tax x amount of a good sold. This is basically the governmental revenue that the government gets. The tax revenues //depend on the sizes of the taxes//. Because the size of the taxes changes the deadweight loss, thus the amount of deadweight loss and tax revenues would be different every time.

←<span style="font-family: Tahoma,Geneva,sans-serif;">Deadweight loss continually INCREASES as tax size INCREASES.

<span style="font-family: Tahoma,Geneva,sans-serif;">←Tax revenue first INCREASES, then DECREASES.

<span style="color: #800080; font-family: Tahoma,Geneva,sans-serif;">**Conclusion:**
<span style="font-family: Tahoma,Geneva,sans-serif;">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. The elasticities of supply and demand curve depend the size of deadweight losses.