A tax has a DWL
because it causes consumers to buy less and producers to sell less
thus shrinking the market below the level that maximizes total
The price elasticities of demand and supply measure how much buyers and
sellers respond to price ch
For the typical worker, the marginal tax rate
(the tax on the last dollar of earnings) is about 40%.
How big is the DWL from this tax?
It depends on elasticity.
If labor supply is inelastic, then this DWL is small.
Some economists believe labor supply is
We determine consumer surplus (CS),
producer surplus (PS), tax revenue,
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.
About the Deadweight Loss
CS = A + B + C
PS = G
Total surplus = A + B
CS = A + B
PS = C + G
Revenue = E
Total surplus = A + B
Analysis of a Tariff on Cotton Shirts
D = deadweight loss from the
F = deadweight loss
No seller would accept less than PW, since
she could sell the good for PW in world markets.
No buyer would pay more than PW, since
he could buy the good for PW in world markets.
A Country That Exports Soybeans
PD = $4
Q = 500
PW = $6
Blue Jeans vs. Clothing
The prices of both goods rise by 20%.
For which good does Qd drop the most? Why?
For a narrowly defined good such as
blue jeans, there are many substitutes
(khakis, shorts, Speedos).
There are fewer substitutes available for broad
Trade can make everyone better off.
The winners from trade could compensate the losers and still be better off.
Yet, such compensation rarely occurs.
The losses are often highly concentrated among
a small group of people, who feel them acutely.
The jobs argument
Trade destroys jobs in industries that compete with imports.
Total unemployment does not rise as imports rise
because job losses from imports are offset by
job gains in export industries.
U.S. Imports & Unemployment,
Well use welfare economics to see how public policy may improve on the market
outcome in such cases.
Despite the possibility of market failure
the analysis applies in many markets, and the invisible hand remains
The height of the D c
So, the shortage
Shortages and Rationing
With a shortage, sellers must ration the goods among buyers.
Some rationing mechanisms: (1) Long lines
(2) Discrimination according to sellers biases
These mechanisms are often unfair, and inefficient: t