Chapter 8 - Application- the costs of taxation

Chapter 8 - Application- the costs of taxation - Chapter 8...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Application: The Costs of Taxation 8
Background image of page 1

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

View Full DocumentRight Arrow Icon
The Deadweight Loss of Taxation Tax on a good Levied on buyers Demand curve shifts downward by the size of  tax Levied on sellers Supply curve shifts upward by the size of tax Same outcome: price wedge Price paid by buyers – rises Price received by sellers – falls Lower quantity sold 2
Background image of page 2
The Deadweight Loss of Taxation Tax burden Distributed between producers and  consumers Determined by elasticities of supply and  demand  Market for the good - smaller 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
Figure The effects of a tax 1 4 Price Quantity 0 Demand Supply Price buyers pay Price without tax Price sellers receive Size of tax A tax on a good places a wedge between the price that buyers pay and the price that sellers receive. The quantity of the good sold falls. Quantity with tax Quantity without tax
Background image of page 4
The Deadweight Loss of Taxation How a tax affects market participants Gains and losses from a tax on a good Buyers: consumer surplus Sellers: producer surplus Government: total tax revenue Tax times quantity sold Public benefit from the tax 5
Background image of page 5

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

View Full DocumentRight Arrow Icon
Figure Tax revenue 2 6 Price Quantity 0 Demand Supply The tax revenue that the government collects equals T × Q, the size of the tax T times the quantity sold Q. Thus, tax revenue equals the area of the rectangle between the supply and demand curves Quantity with tax Quantity without tax Size of tax (T) Quantity sold (Q) Tax revenue T Q ˣ Price buyers pay Price sellers receive
Background image of page 6
The Deadweight Loss of Taxation Welfare without a tax Consumer surplus Producer surplus Total tax revenue = 0 Welfare with tax Smaller consumer surplus Smaller producer surplus Total tax revenue Smaller overall welfare 7
Background image of page 7

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

View Full DocumentRight Arrow Icon
Figure How a tax affects welfare 3 8 Price Quantity 0 Demand Supply A tax on a good reduces consumer surplus (by the area B + C) and producer surplus (by the area D + E). Because the fall in producer and consumer surplus exceeds tax
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/26/2010 for the course ECON 002 taught by Professor Eudey during the Spring '08 term at UPenn.

Page1 / 22

Chapter 8 - Application- the costs of taxation - Chapter 8...

This preview shows document pages 1 - 9. Sign up to view the full document.

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