ch20_tax_inefficiencies - Chapter 20- Tax Inefficiencies...

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Chapter 20- Tax Inefficiencies consumer surplus (CS) benefit to the consumer from buying the good willingness to pay – amount buyer actually pays (price area below the demand curve (wtp) and above the P out to the equilibrium Q producer surplus (PS) benefit to seller from selling the good benefit to seller (price) – cost to the seller area above supply curve (cost) and below the price out the equilibrium Q
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Tax is levied on sellers rules for CS, PS when there is a tax on sellers #1) CS after tax= what consumers willing to pay – what actually pay use original D (willingness to pay) and P2 (price actually pay) #2) PS after tax= amount sellers receive at end of day – true cost (net of tax) use P2-tax (price actually receive) and original S (true cost) #3) tax revenue= tax (vertical distance between S curves) * new Q (Q2) #4) TS= CS + PS + tax revenue why tax revenue count as part of TS? can use revenue for useful purposes (someone benefits) Before tax After tax Change CS PS tax revenue TS deadweight loss (DWL)- ↓ TS resulting from market distortion (such as a tax) 2
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Tax levied on consumers rules for CS, PS when there is a tax on consumers #1) CS after tax= true willingness to pay – what actually pay use original D (willingness to pay) and P2 + tax (price actually pay) #2) PS after tax= amount sellers receive at end of day – true cost use P2 (price actually receive) and original S (true cost) #3) tax revenue= tax (vertical distance between D curves) * new Q (Q2) #4) TS= CS + PS + tax revenue why tax revenue count as part of TS? can use revenue for useful purposes (someone benefits) Before tax After tax Change CS PS tax revenue TS 3
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Elasticities determine tax inefficiency “The more elastic the demand or supply of a good is, the larger the change in quantity induced by the tax, and the larger the inefficiency of the tax.” (551) Figure 5 (DWL depends on elasticities) “Supply, demand, elasticity, DWL… these ideas go to the heart of a profound political question: How big should the government be? The debate hinges on these concepts because the larger the
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ch20_tax_inefficiencies - Chapter 20- Tax Inefficiencies...

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