Application: The Costs of Taxation

A collection of vocabulary flashcards related to the economic impacts of taxation, focusing on key terms and their definitions.

Consumer Surplus (CS)

The benefit consumers receive when they purchase a product for less than the maximum price they are willing to pay.

Producer Surplus (PS)

The benefit producers receive when they sell a product for more than the minimum price they are willing to accept.

Total Surplus (TS)

The total benefit to society, calculated as the sum of consumer surplus and producer surplus.

Deadweight Loss (DWL)

The reduction in total surplus that results from a market distortion, such as a tax.

Tax Revenue

The income that is gained by governments through taxation, calculated as the tax per unit multiplied by the quantity sold.

Equilibrium Price (PE)

The price at which the quantity demanded by consumers equals the quantity supplied by producers.

Equilibrium Quantity (QE)

The quantity of a good that is bought and sold at the equilibrium price.

Tax Incidence

The distribution of the tax burden between buyers and sellers.

Elasticity of Demand

The responsiveness of the quantity demanded to a change in price.

Elasticity of Supply

The responsiveness of the quantity supplied to a change in price.

Tax Wedge

The difference between the price paid by buyers and the price received by sellers due to a tax.

Welfare Analysis

An assessment of the well-being of individuals in an economy, often impacted by policies such as taxation.

Market Distortion

Any change in the market caused by external factors, such as taxes, regulations, or other government interventions.

Price Elasticity

A measure of how much the quantity demanded or supplied of a good responds to a change in price.

Laffer Curve

A graphical representation of the relationship between tax rates and tax revenue.

Short Run vs Long Run Elasticity

In the short run, elasticity tends to be lower, while in the long run, it is generally higher due to adjustments in behavior.

Close Substitutes

Goods that can easily replace each other, leading to higher price elasticity of demand.

Necessities vs Luxuries

Necessities have lower elasticity, while luxuries tend to have higher elasticity, affecting deadweight loss differently.