Principles of Economics- Mankiw (5th) 157

Principles of Economics- Mankiw (5th) 157 - CHAPTER 8 A P P...

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CHAPTER 8 APPLICATION: THE COSTS OF TAXATION 163 is that the tax places a wedge between the price buyers pay and the price sellers re- ceive. Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax. In other words, a tax on a good causes the size of the market for the good to shrink. These results should be familiar from Chapter 6. HOW A TAX AFFECTS MARKET PARTICIPANTS Now let’s use the tools of welfare economics to measure the gains and losses from a tax on a good. To do this, we must take into account how the tax affects buyers, sellers, and the government. The benefit received by buyers in a market is mea- sured 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 mar- ket is measured by producer surplus—the amount sellers receive for the good mi- nus their costs. These are precisely the measures of economic welfare we used in Chapter 7. What about the third interested party, the government? If
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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