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Unformatted text preview: PRINCIPLES of M ICROECONOMICS by N. Gregory Mankiw (4 th Edition) Chapter Eight Outline CHAPTER E IGH T APPL ICAT ION: T HE COSTS OF TAXAT ION The Deadweight Loss of Taxation- I t does not matter whether a tax on a good is levied on buyers or sellers of the good. o When a tax is levied on buyers, the demand curve shifts downward by the size of the tax o When it is levied on sellers, the supply curve shifts upward by that amount How a tax affects market participants- A tax places a wedge between the price buyers pay and the price sellers receive. o Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax. o The size of the market for that good shrinks- Benefit received by buyers = consumer surplus - Benefit revived by sellers = producer surplus- Use tax revenue to measure the governments benefit from the tax = T x Q (size of the tax times the quantity sold Q). Therefore, tax revenue equals the area of the rectangle between the supply and demand curves.area of the rectangle between the supply and demand curves....
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