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mankiw ch.8 - Ch 8 Pg 1 8 The Costs of Taxation Mankiw ch 8...

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8 The Costs of Taxation Mankiw - ch. 8 Dr. Fred Aswani We saw earlier how taxes on goods & services can change the demand, supply, and equilibrium price & quantity Taxes provide revenues to government & are usually paid by both buyers & sellers To see the welfare effect of taxes, we need to compare the revenue received by the government & the deadweight loss to the consumers & producers Deadweight loss of taxation In a competitive market, a given tax surcharge added to the price of each unit of a particular good-e.g.gasoline tax, will T lower the price received by the seller T increase the price paid by the buyer This allows us to use supply & demand diagram to analyze the Ch. 8 Pg. 1
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effects of a tax on total surplus We see that the tax places a wedge between the gross price (P B= P D ) & net prices (sellers price) and the equilibrium quantity will fall as a result of the tax See fig. 8.1 & 8.2 What are the gains & losses as a result of a tax? The government receives tax revenue of T x Q where T = amount of tax per unit Q = quantity sold
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