Chapter 8; Application: The Cost of Taxation
•
A tax on a good affects its price and the quantity sold and how the forces of supply and demand
divide the burden of a tax between buyers and sellers
•
Tax raises the price buyers pay and lowers the price sellers receive
The Deadweight Loss of Taxation
•
The outcome is the same whether a tax on a good is levied on buyers or sellers of a good
•
Tax on buyers = demand curve shifts downward by the size of tax
•
Tax on sellers = supply curve shifts upward by amount
•
Elasticities of supply and demand determine how the tax burden is distributed between producers
and consumers
How a Tax Affects Market Participants
•
The benefit received by buyers in a market is measured by consumer surplus
•
The benefit received by sellers in a market is measured by producer surplus
•
Government receives the total tax revenue: TxQ
•
The government’s tax revenue is represented by the rectangle between supple and demand curve
Welfare Without a Tax
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