Lecture 9 Notes - Econ 101 Introduction to Microeconomics...

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Unformatted text preview: Econ 101 Introduction to Microeconomics Professor Richard V. Burkhauser 8 Application: The Costs of Taxation Key Concepts deadweight loss, p. 163 Econ 101 Professor Burkhauser Figure 8.1 The Effects of a Tax Price Supply Price buyers pay Price without tax Price sellers receive Demand Size of tax 0 Quantity with tax Quantity without tax Quantity How a Tax Affects Market Participants Tax Revenue T = the size of the tax Q = the quantity of the good sold T times Q = the government's tax revenue Econ 101 Professor Burkhauser Figure 8.2 Tax Revenue Price Supply Price buyers pay Size of tax (T) Tax revenue (T Q) Price sellers receive Quantity sold (Q) 0 Quantity with tax Quantity without tax Demand Quantity Figure 8.3 How a Tax Effects Welfare Price Price buyers = PB pay Price without tax = P1 Price sellers = PS receive A B D F Supply C E Demand 0 Q2 Q1 Quantity Table 8.1 How a Tax Affects Welfare Figure 8.4 The Deadweight Loss Price PB Size of tax Price without tax PS Lost gains from trade Supply Value to buyers 0 Q2 Q1 Cost to sellers Demand Quantity Reduction in quantity due to the tax DETERMINANTS OF THE DEADWEIGHT LOSS What determines whether the deadweight loss from a tax is large or small? The magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price. That, in turn, depends on the price elasticities of supply and demand. Econ 101 Professor Burkhauser Figure 8.5 Tax Distortions and Elasticities P P S Lost consumer surplus Size of tax S P* Lost producer surplus Lost consumer surplus Size of tax Lost producer surplus P* D Elastic Supply Q* Q D Inelastic Supply Q* Q Figure 8.6 Tax Distortions and Elasticities P P S Lost consumer surplus Size of tax Lost consumer surplus S P* Size of tax Lost producer surplus P* D Lost producer surplus D Q Elastic Demand Q* Inelastic Demand Q* Q DETERMINANTS OF THE DEADWEIGHT LOSS The greater the elasticities of demand and supply: the larger will be the decline in equilibrium quantity and, the greater the deadweight loss of a tax. Econ 101 Professor Burkhauser Question 8.1: Deadweight loss from a tax Suppose the Federal Government places a 50 cents/gallon tax on the producers of gasoline. What would you expect to happen to the deadweight loss related to the gasoline tax after two years? It will increase only if the supply of heating oil is more elastic than the demand for heating oil. It will decrease. It will decrease only if the supply of heating oil is more elastic than the demand for heating oil. It will increase. Econ 101 Professor Burkhauser a) b) c) d) ...
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This note was uploaded on 12/08/2007 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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