Chap_08 - A tax drives a wedge between the price buyers pay

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APPLICATION: THE COSTS OF TAXATION 1 Review:  What You Have ALREADY  Learned About Taxes A tax drives a wedge between the price buyers pay and the price sellers receive. raises the price buyers pay and lowers the price sellers receive. reduces the quantity bought & sold. These effects are the SAME whether the tax is imposed on: buyers or sellers.
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APPLICATION: THE COSTS OF TAXATION 2 Q T The Effects of a Tax P Q D S Eq’m with no tax: Price = P E Quantity = Q E P S P B P E Q E Eq’m with tax = $ T per unit: Sellers receive P S Quantity = Q T Buyers pay P B Size of tax = $ T
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APPLICATION: THE COSTS OF TAXATION 3 The Effects of a Tax P Q D S Revenue from tax: $ T x Q T P S P B P E Q E Q T Size of tax = $ T
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APPLICATION: THE COSTS OF TAXATION 4 The Effects of a Tax Next, we apply welfare economics to measure the gains and losses from a tax. We determine consumer surplus (CS), producer surplus (PS), tax revenue, and total surplus with and without the tax. Tax revenue can fund beneficial services ( e.g ., education, roads, police) so we include it in total surplus.
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APPLICATION: THE COSTS OF TAXATION 5 The Effects of a Tax P Q D S Without a tax, P E Q E 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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APPLICATION: THE COSTS OF TAXATION 6 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 reduces total surplus by C + E
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APPLICATION: THE COSTS OF TAXATION 7 The Effects of a Tax 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.
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APPLICATION: THE COSTS OF TAXATION 8 About the Deadweight Loss P Q D S P S P B Q E Q T Because of the tax, the units between Q T and Q E are not sold. The value of these units to buyers is greater than the cost of producing them, so the tax prevents some mutually beneficial trades.
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A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Analysis of tax Analysis of tax 9 A. Compute CS, PS, and total surplus without a tax. B.
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This note was uploaded on 04/20/2011 for the course ECON 130 taught by Professor Kikuchi,g during the Fall '08 term at University of Hawaii, Manoa.

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Chap_08 - A tax drives a wedge between the price buyers pay

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