Chap08 - Chapter8 ofTaxation 8 a. APPLICATION:THECOSTSOF...

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Chapter 8   of Taxation Problems and Applications 1. a. Figure 3 illustrates the market for pizza. The equilibrium price is  P 1 , the equilibrium  quantity is  Q 1 , consumer surplus is area A + B + C, and producer surplus is area D + E +  F. There is no deadweight loss, as all the potential gains from trade are realized; total  surplus is the entire area between the demand and supply curves: A + B + C + D + E + F. Figure 3 b. With a $1 tax on each pizza sold, the price paid by buyers,  P B , is now higher than the  price received by sellers,  P S , where  P B  =  P S  + $1. The quantity declines to  Q 2 , consumer  surplus is area A, producer surplus is area F, government revenue is area B + D, and  deadweight loss is area C + E. Consumer surplus declines by B + C, producer surplus  declines by D + E, government revenue increases by B + D, and deadweight loss  increases by C + E. c. If the tax were removed and consumers and producers voluntarily transferred B + D to  155 8 APPLICATION: THE COSTS OF  TAXATION
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156   Chapter 8 /Application: The Costs of Taxation the government to make up for the lost tax revenue, then everyone would be better off  than without the tax. The equilibrium quantity would be
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This note was uploaded on 10/13/2010 for the course ECON 200 taught by Professor Levendis during the Fall '07 term at Loyola New Orleans.

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Chap08 - Chapter8 ofTaxation 8 a. APPLICATION:THECOSTSOF...

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