Chapter%2080.A - CHAPTER 8 CHAPTER THE COSTS OF TAXATION...

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CHAPTER 8 CHAPTER 8 THE COSTS OF TAXATION THE COSTS OF TAXATION
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Main issues How does a tax affect consumer surplus, producer surplus, and total surplus? What is the deadweight loss of a tax? What factors determine the size of this deadweight loss? How does tax revenue depend on the size of the tax?
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Recall:   A tax is a wedge between the price buyers pay and the price sellers receive. A tax raises the price buyers pay and lowers the price sellers receive. A tax reduces the quantity bought & sold. These effects are the same whether the tax is imposed on buyers or sellers, so we do not make this distinction in this chapter.
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Q T The Effects of a Tax P Q D S With no tax, eq’m price is P E and quantity is Q E . P S P B P E Q E Gov’t imposes a tax of $ T per unit. the price sellers receive is P S , and quantity is Q T . The price buyers pay is P B , Size of tax = $ T
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The Effects of a Tax P Q D S The tax generates revenue equal to $ T x Q T . P S P B P E Q E Q T Size of tax = $ T
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The Effects of a Tax P Q D S Without a tax, P E 23 Q T A B C D E F CS = A + B + C PS = D + E + F Tax revenue = 0 Total surplus = CS + PS = A + B + C + D + E + F
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The Effects of a Tax P Q D S P S P B Q E Q T A B C D E F CS = A PS = F Tax revenue = B + D Total surplus = A + B + D + F With the tax, The tax causes total surplus to fall by C + E
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P Q D S P S P B Q E Q T A B C D E F C + E is called the deadweight loss (DWL) of the tax, the fall in total surplus that results from a market distortion, such as a tax. The losses to buyers
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Chapter%2080.A - CHAPTER 8 CHAPTER THE COSTS OF TAXATION...

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