Lecture_chapter8

Lecture_chapter8 - Lecture 11 (Chapter 8) Review from...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 11 (Chapter 8)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
APPLICATION: THE COSTS OF TAXATION 2 Review from Chapter 6 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, so we do not make this distinction in this chapter.
Background image of page 2
APPLICATION: THE COSTS OF TAXATION 3 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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
APPLICATION: THE COSTS OF TAXATION 4 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
Background image of page 4
APPLICATION: THE COSTS OF TAXATION 5 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.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
APPLICATION: THE COSTS OF TAXATION 6 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
Background image of page 6
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 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
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
APPLICATION: THE COSTS OF TAXATION 8 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.
Background image of page 8
APPLICATION: THE COSTS OF TAXATION 9 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.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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 10 A. Compute CS, PS, and total surplus without a tax. B.
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 32

Lecture_chapter8 - Lecture 11 (Chapter 8) Review from...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online