Costs of taxation complete lecture

Costs of taxation complete lecture - Costs of Taxation This...

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Costs of Taxation This topic builds on the tools of welfare This topic builds on the tools of welfare economics from the last chapter (Ch 7) economics from the last chapter (Ch 7) to analyze the effect of a tax (from Chapter 6) using elasticities of demand and supply (Chapter 5)
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Using the concepts introduced in the last three topics, we will answer the following questions: 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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Review from Chapter 6 s A tax s drives a wedge between the price buyers pay and the price sellers receive. s raises the price buyers pay and lowers the price sellers receive. s reduces the quantity bought & sold. s These effects are the same whether the tax is imposed on buyers or sellers, so we do not make this distinction any more.
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Q T The Effects of a Tax P Q D S Equilibrium with no tax: Price = P E Quantity = Q E P S P B P E Q E Equilibrium with tax = $ T per unit: Sellers receive P S Quantity = Q T Buyers pay P B Size of tax = $ T
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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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The Effects of a Tax s Next, we apply welfare economics to measure the gains and losses from a tax. s We determine consumer surplus (CS), producer surplus (PS), tax revenue, and total surplus with and without the tax. s Tax revenue can fund beneficial services (e.g., education, roads, police), so we include it in total surplus.
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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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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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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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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
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Costs of taxation complete lecture - Costs of Taxation This...

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