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Chapter 8 Notes - The greater the elasticity’s of supply...

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Chapter 8 Notes Taxes cause deadweight losses because they prevent people from realizing the gains of commerce Taxes take away from a consumer surplus and a supplier surplus Losses to buyers and sellers exceed the revenue gained from the government by taxes Deadweight losses are caused by the loss of marginal buyers and sellers who are pushed out of the market by the increase in prices caused by taxes Represented on graph by the area right of the tax wedge between the demand curve and supply curve Holding demand curve constant The deadweight loss is more when the supply curve is more elastic Holing the supply curve constant The deadweight loss is more when the demand curve is more elastic
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Unformatted text preview: The greater the elasticity’s of supply and demand, the greater the deadweight loss Marginal tax rate- tax on the last dollar of earnings Approaches 50% on US worker earnings Economists argue of the size of deadweight loss in the US economy, argument hinges on the elasticity of labor Deadweight loss also increases as a square of the size of an increase in the tax wedge Laffer Curve- supply side- graph of tax revenue x tax size, convex side facing up “High taxes lower incentive to work, thereby decreasing taxable income and government revenue”-debate over which side of Laffer Curve we are on...
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