Chapter on Taxes from Economics by Krugman and Wells

These flashcards cover key concepts related to taxes as discussed in the chapter, including their effects on supply and demand, tax incidence, efficiency, and deadweight loss.

Taxes

Government-imposed charges on goods, services, or income that affect supply and demand.

Excise Tax

A tax on each unit sold, impacting the price buyers pay and the price sellers receive.

Tax Incidence

The measure of who actually pays a tax, regardless of who legally pays it.

Deadweight Loss

The loss in total welfare that occurs because a tax prevents mutually beneficial transactions.

Price Elasticity of Demand

A measure of how much the quantity demanded changes when the price changes.

Price Elasticity of Supply

A measure of how much the quantity supplied changes when the price changes.

Equilibrium Price

The market price where the quantity of a good demanded is equal to the quantity supplied.

Administrative Costs of Taxation

Resources used for tax collection and enforcement, which can contribute to overall inefficiency.

Efficiency

In tax policy, the goal of minimizing deadweight loss and maximizing total surplus.

Equity

Fairness in tax policy, often contrasted with efficiency.

Inelastic Demand

Demand that changes little when the price changes.

Elastic Demand

Demand that changes significantly in response to price changes.

Burden of a Tax

The distribution of tax costs between buyers and sellers.

Revenue from an Excise Tax

Calculated as the tax amount per unit multiplied by the number of units sold.

Trade-offs in Tax System Design

The necessary balance between equity (fairness) and efficiency in taxation.

Impact of Tax Rate Increase

Higher tax rates can lead to increased revenue if demand and supply are inelastic, but may reduce revenue if they are elastic.