Principles of Economics- Mankiw (5th) 162

Principles of Economics- Mankiw (5th) 162 - 168 PA R T T H...

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168 PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE CASE STUDY THE DEADWEIGHT LOSS DEBATE Supply, demand, elasticity, deadweight loss—all this economic theory is enough to make your head spin. But believe it or not, these ideas go to the heart of a pro- found political question: How big should the government be? The reason the de- bate hinges on these concepts is that the larger the deadweight loss of taxation, the larger the cost of any government program. If taxation entails very large dead- weight losses, then these losses are a strong argument for a leaner government that does less and taxes less. By contrast, if taxes impose only small deadweight losses, then government programs are less costly than they otherwise might be. So how big are the deadweight losses of taxation? This is a question about which economists disagree. To see the nature of this disagreement, consider the most important tax in the U.S. economy—the tax on labor. The Social Se- curity tax, the Medicare tax, and, to a large extent, the federal income tax are
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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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