Intro to Microeconomics_Agnello_Date_040810

Intro to Microeconomics_Agnello_Date_040810 - - Why do we...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
- Why do we have deadweight loss? - Market shrinks - Participation falls - Buyers and sellers respond to tax disincentives and leave market - Certain marginal trades (exchanges) between buyers and sellers don’t occur - Tax eliminates all transactions where buyer values do not exceed the cost to suppliers by more than the tax - Figure 4: Trades (sales, exchanges) between Q2 and Q1 won’t happen because the gains from trade (PD-PS) are less than the tax in this range - Joe ad Jane are an example - Joe cleans houses for less than or equal to $80 (i.e. opportunity cost = $80) - Jane will pay to have her house cleaned if P is less than or equal to $120 - Without taxation on cleaning , they agree on $100 - Each receive a surplus of $20 - (CS +PS = $40) - Government enters - tax = $50 per cleaning - Market shrinks to 0 - CS = PS = government revenue = 0 - Why collapse? - Because tax (50$) > total surplus ($40) - Transaction between Joe and Jane is not worth paying the government $50 - If the tax is levied on Joe, he must charge $130, but Jane won’t buy if P> $120
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

Intro to Microeconomics_Agnello_Date_040810 - - Why do we...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online