EconH200L8

EconH200L8 - Application of Welfare Analysis: The Costs of...

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Application of Welfare Analysis: The Costs of Taxation A tax causes the after-tax price paid by consumers to go up, and the after-tax price received by sellers to go down. The tax causes consumer surplus and producer surplus to go down. However, the tax revenue provides the government with surplus. Note: From Chapter 6, we saw that the equilibrium quantity and the after-tax prices paid by consumers and producers did not depend on who the tax is levied upon. Therefore, we can see the effect of a tax on the demand-supply diagram based on the original curves, by finding the quantity at which the difference between willingness to pay and willingness to sell equals the tax.
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How does the loss of consumer and producer surplus compare with the revenue received by the government? Answer: the revenue received by the government (government surplus) is less than the loss of surplus by consumers and firms. Total surplus, of consumers, producers, and
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This note was uploaded on 07/17/2008 for the course H 200 taught by Professor Fleisher during the Fall '08 term at Ohio State.

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EconH200L8 - Application of Welfare Analysis: The Costs of...

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