Principles of Economics- Mankiw (5th) 161

Principles of Economics- Mankiw (5th) 161 - elastic the...

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CHAPTER 8 APPLICATION: THE COSTS OF TAXATION 167 Let’s consider first how the elasticity of supply affects the size of the dead- weight loss. In the top two panels of Figure 8-5, the demand curve and the size of the tax are the same. The only difference in these figures is the elasticity of the sup- ply curve. In panel (a), the supply curve is relatively inelastic: Quantity supplied responds only slightly to changes in the price. In panel (b), the supply curve is (a) Inelastic Supply (b) Elastic Supply Price 0 Quantity Price 0 Quantity Demand Supply (c) Inelastic Demand (d) Elastic Demand Price 0 Quantity Price 0 Quantity Size of tax Size of tax Demand Supply Demand Demand Supply Supply Size of tax Size of tax When supply is relatively inelastic, the deadweight loss of a tax is small. When supply is relatively
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Unformatted text preview: elastic, the deadweight loss of a tax is large. When demand is relatively elastic, the deadweight loss of a tax is large. When demand is relatively inelastic, the deadweight loss of a tax is small. Figure 8-5 T AX D ISTORTIONS AND E LASTICITIES . In panels (a) and (b), the demand curve and the size of the tax are the same, but the price elasticity of supply is different. Notice that the more elastic the supply curve, the larger the deadweight loss of the tax. In panels (c) and (d), the supply curve and the size of the tax are the same, but the price elasticity of demand is different. Notice that the more elastic the demand curve, the larger the deadweight loss of the tax....
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