Chapter 8 notes .docx - Chapter 8 Application The costs of taxation 8-1 The Deadweight loss of taxation When a tax is levied on buyer the demand curve

Chapter 8 notes .docx - Chapter 8 Application The costs of...

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Chapter 8: Application: The costs of taxation 8-1: The Deadweight loss of taxation When a tax is levied on buyer, the demand curve shifts downward by the size of the tax; when it is levied on sellers, the supply curve shifts upwards by that amount o When tax is enacted, the price paid by buyers raises, and the price received by sellers falls o o o o o o o Which curve shifts depends on whether the tax is levied on sellers (the supply curve shifts) or buy- ers (the demand curve shifts). 8-1 A: how a tax affects market participants The benefit received by buyers in a market is measured by consumer surplus- the amount buyers are willing to pay for the good minus the amount they actually pay for it The benefit received by sellers in a market is measured by producer surplus – the amount sellers receive for the good minus their cost If T is the size of the tax and Q is the quantity of the good sold, then the government gets total tax revenue of T x Q To analyze how taxes affect economic well-being, we use the government’s tax revenue to measure the public benefit from the tax. government’s tax revenue is represented by the rectangle between the supply and the demand curves. The height of this rectangle is the size of the tax, T , and the width of the rectangle is the quantity of the good sold, Q . B/c a rectangle’s area is its height times its width, his rectangle’s area is T x Q , which equals the tax revenue The effects of a tax A tax on a good places a wedge b/w the price that buyers pay and the price that sellers receive. The quantity of the good sold falls. Tax revenue The tax revenue that the government collects equals T x Q , the size of the tax T rimes the quantity sold Q . Thus, tax revenue equals the area of the rectangle between the supply and demand curve
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