162 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE The effects of taxes on welfare might at first seem obvious. The government enacts taxes to raise revenue, and that revenue must come out of someone’s pocket. As we saw in Chapter 6, both buyers and sellers are worse off when a good is taxed: A tax raises the price buyers pay and lowers the price sellers receive. Yet to understand fully how taxes affect economic well-being, we must compare the reduced welfare of buyers and sellers to the amount of revenue the government raises. The tools of consumer and producer surplus allow us to make this compar-ison. The analysis will show that the costs of taxes to buyers and sellers exceeds the revenue raised by the government. THE DEADWEIGHT LOSS OF TAXATION We begin by recalling one of the surprising lessons from Chapter 6: It does not matter whether a tax on a good is levied on buyers or sellers of the good. When a tax is levied on buyers, the demand curve shifts downward by the size of the tax;
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