E201 Ch8 Notes - ECON 201 CHAPTER 8 THE COSTS OF TAXATION(The Effects of Taxes and Market Efficiency Recall that when a per-unit tax(excise tax is

E201 Ch8 Notes - ECON 201 CHAPTER 8 THE COSTS OF...

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ECON 201CHAPTER 8 – THE COSTS OF TAXATION (The Effects of Taxes and MarketEfficiency)Recall that when a per-unit tax (excise tax) is imposed on a good: If the tax is levied on buyers, then the demand curve shifts downward (to the left) by the size of tax.If the tax is levied on sellers, then the supply curve shifts upward (to the left) by the size of the tax.In both cases there is the same outcome. The price paid by buyers rises, the price received by sellers falls and the quantity sold decreases (the market for the good issmaller).The tax burden is distributed between producers and consumers based on the elasticities of supply and demand.To determine how an excise tax affects market participants we determine:Total tax revenue for the government (public benefit)Consumer surplus with and without the taxProducer surplus with and without the tax.1
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Without the tax, welfare is equal to:Total Surplus = Consumer Surplus + Producer SurplusWith the tax, welfare is equal to:
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