Intro to Microeconomics_Agnello_Date_040610

Intro to Microeconomics_Agnello_Date_040610 - Chapter 8...

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Now let’s look at total market value and find where value is the greatest Max. CS + PS = max. [net buyer value + net seller value] Max. = [(value to buyer - amt. paid) + (seller revenue - cost)] Amount paid and seller revenue cancel out, thus: Max. = [value to buyers - cost] Efficiency reflects maximizing this and free market equilibrium achieves this MB=MC Final Conclusions P and Q are just right and maximize society’s net benefit from any market The best P and Q is at the equilibrium 3 results at equilibrium Supply is allocated to highest - valued less Demand is allocated to lowest cost producers Total surplus (CS + PS) maximized Price rations or allocates Q to the right suppliers (cheapest) and demanders (highest) Governments should usually leave markets alone Laissez Faire ( assumes no market failures such as monopoly power or externalities) Economists agree that free markets should be encouraged
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Unformatted text preview: Chapter 8: Costs of Taxation Do taxes reduce the value of markets to society even after including tax revenue? Generally, yes Main argument for small government because taxation shrinks size of economic pie to be distributed. Thus efficiency is impaired as the cost of more equity Recall: Taxes on goods and services shift S and/or D curves left depending on levy. Don’t need to show actual curve(s) shifting Price rises to buyers Price falls for sellers Q falls until (PD-PS) = tax Tax wedge between PD and PS, levy is irrelevant What effect does tax have on benefit of market participation Now 3 participants Buyers Sellers Government For buyers CS falls For sellers PS falls For government tax revenue rises Dead weight loss of taxation unless S and/or D are totally inelastic...
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