Taxation%20and%20efficiency - Taxation and efficiency The...

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    1 Taxation and efficiency The result that markets are efficient depends on a number of  assumptions. One of them is that the price consumers pay = price producers  receive. When government imposes a tax on a commodity it introduces a  “wedge” between these two prices. Because producers/consumers can reduce tax burden by reducing  Q, such taxes are distortionary. Contrast with a “head tax,” which cannot be avoided. Similar issues arise when “frictions” induce a bid-ask spread in  prices (more later).
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    2 Q P D S Q* S’ “t” acts like a per unit increase in costs – an increase in MC of “t” per unit shifts supply up Q’ P’+t P’ Suppose government imposes a per unit  tax “t” on production  P’+t is price paid by consumers, but firm only gets to keep P’
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    3 Q P D S Q* S’ Q’ P’+t P’ Suppose government imposes a per unit  tax “t” on production  A B C D Change in CS: - A - C Change in PS: - B - D Gov Revenue:  A + B |DWL|:  C + D DWL is due to quantity  distortion.
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    4 Deadweight loss of taxation Taxing an economic activity generally results in less of that  activity. Combined loss of CS and PS generally exceeds revenue  raised because of the quantity distortion. There is an “excess burden” of taxation. The cost of raising $1 of government revenue is more than  $1. If government revenue is put to “good use,” benefit of  government services provided with revenue may outweigh  this excess burden.
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    5 Article: “Alcohol tax increases ‘almost 90 percent’” Daily 
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Taxation%20and%20efficiency - Taxation and efficiency The...

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