Chapter 8 Hanna K
BEFORE WE GO IN...
Watch this quick video that was used as tax propaganda. Pay attention to why the government will use this kind of propaganda. What's the purpose of tax? WATCH AND LEARN FROM DONALD DUCK! :D
Why do so many politicians revolve their campaign around "tax"?
Every presidential campaign, it seems that the candidates focus a lot about their plans about the taxing system. Depending on the presidential plan on tax, people either turn angry or satisfied. Hence, in early of American society, there were rebellions solely caused by grudges toward taxes such as the whiskey rebellion. In this chapter, we will focus on why tax is so important and the consequences of tax.
In this section,we will explore three key points of tax!
KEY POINT 1) DEAD WEIGHT LOSS
DEAD WEIGHT LOSS. Already from its name, we can imply it ain't something so good. Dead weight loss refers to the fall in total surplus. Because tax reduces the total surplus (consumer as well as producer), it distorts the behavior of the market. Buyers consume less and producers produce less which collectively leads to the market efficiency to go down by drifting away from the point of equilibrium.
The dead weight loss goes to NO ONE, not the government, consumer nor the producer, so in a simple means, you can consider it as a waste.
KEY POINT 2) ELASTICITY AND TAX
Even though the size of the tax might be same, depending on the price elasticity of a graph, the size of dead weight loss differs. The more elastic the supply/demand curve, the greater the dead weight loss. Why is this so? In order to understand this phenomenon we can look back to our chapter in elasticity. Elasticity measures how much a market responds to its market conditions. Therefore, in an elastic market if the tax is enforced, there will be much more change in the behavior of producers as well as buyers.
KEY POINT 3) LAFFER CURVE
Laffer graph shows us that as tax grows bigger, the incentive becomes increasingly distorted. As incentive changes people's decision making process, the dead weight gets larger and larger.As shown in the curve, the tax revenue initially increases and then decreases.
1. The loss of total surplus in a market resulting from a tax is called:
government revenue from the tax.
When a tax is imposed, the quantity traded in a market will and total surplus will .
When a tax is imposed, which of the following will occur?
Consumer surplus will increase.
Producer surplus will increase.
Government tax revenue will decrease.
A deadweight loss will occur in the market.
the fall in total surplus that results from a market distortion, such as a tax
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