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Chapter 8 Lecture Outline - Economics 101H Vandan Desai...

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Economics 101H Vandan Desai P a g e | 1 Chapter 8: Application – The Costs of Taxation (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- I. The Deadweight Loss of Taxation A. It does not matter whether a tax on a good is levied on buyers or sellers of the good … the price paid by buyers rises , and the price received by sellers falls i. When a tax is levied on buyers , demand curve shifts downward by size of tax ii. When it is levied on sellers , the supply curve shifts upward by that amount B. Tax places a wedge between the price buyers pay and the price sellers receive i. Quantity sold falls below the level that would be sold without a tax ii. Tax on a good causes the size of the market for the good to shrink C. How a Tax Affects Market Participants i. Tax Revenue T = the size of the tax Q = the quantity of the good sold T x Q = the government’s tax revenue ii. How a Tax Affects Welfare:
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Economics 101H Vandan Desai P a g e | 2 iii. Changes in Welfare Tax makes buyers and sellers worse off and the government better off
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