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1 CHAPTER 8 APPLICATION OF CONSUMER AND PRODUCER SURPLUS: THE COST OF TAXATION In this chapter, we use the concepts of consumer and producer surplus learned in chapter 7 to examine how taxes affect the economic well-being of participants in the labor market. A) Deadweight Loss: In chapter 6, we saw that a tax levied on consumers has the same effect that a tax levied on producers. In both cases, the quantity sold in the market of a particular good or service decreases, whereas the price of the good or service rises as a consequence of the tax. Hence, the only benefit to society resulting from the tax is the revenue collected by the government, which may get passed on to consumers and producers in the market in the form of government services. In this chapter, we show that the revenue collected from taxes is, unfortunately, smaller than the losses to buyers and sellers in the market as a result of the tax. The amount by which the
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