Chapter 8 Cost of Tax - 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

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