Chapter 8 - Tagged
Page 1: Application of Taxation
Title: The Costs of Taxation
Chapter: 8
Page 2: The Deadweight Loss of Taxation
Tax Burden:
Distributed between producers and consumers.
Determined by elasticities of supply and demand.
Market for the Good:
Smaller market leads to different impacts.
Page 3: Effects of a Tax
A tax creates a wedge between:
Price buyers pay.
Price sellers receive.
Result:
Quantity of the good sold decreases.
Visual representation of the impact of the tax on price and quantity.
Page 4: Market Participants and Tax Impact
Effects on Market Participants:
Buyers face a reduction in consumer surplus.
Sellers face a reduction in producer surplus.
Government benefits through total tax revenue (Tax times quantity sold).
Public Benefit from Tax:
Tax revenue contributes to public services.
Page 5: Tax Revenue Calculation
Formula for Tax Revenue:
Tax revenue = T × Q (Tax size times quantity sold).
Representation:
Area of the rectangle formed by the supply and demand curves indicates tax revenue.
Page 6: Welfare Effects of Tax
Tax effects on welfare:
Reduces consumer surplus (Areas B + C).
Reduces producer surplus (Areas D + E).
Tax revenue received doesn't compensate for losses (Deadweight Loss: Areas C + E).
Comparison of Surplus:
Total Surplus (A+B+C) and the reduced total surplus indicate deadweight loss characteristics.
Page 7: Gains from Trade
Taxes Cause Deadweight Loss:
Disrupt trades between buyers and sellers, preventing gains from trade.
Result: Deadweight loss arises when trades that could benefit both parties are not executed.
Page 8: Determinants of Deadweight Loss
Price Elasticities of Supply and Demand:
More elastic supply = larger deadweight loss.
More elastic demand = larger deadweight loss.
Conclusion:
Greater elasticities lead to greater deadweight loss of a tax.
Page 9: Tax Distortions and Elasticities - Part 1
Comparison of Elasticities (Panels a & b):
(a) Inelastic supply: smaller deadweight loss.
(b) Elastic supply: larger deadweight loss.
Concept:
Change in supply elasticity affects overall market efficiency under taxation.
Page 10: Tax Distortions and Elasticities - Part 2
Comparison of Demand Elasticities (Panels c & d):
(c) Inelastic demand: smaller deadweight loss.
(d) Elastic demand: larger deadweight loss.
Takeaway:
Similar to supply, demand elasticity significantly impacts deadweight loss.
Page 11: Deadweight Loss & Tax Revenue as Taxes Vary
Tax Increases:
Deadweight loss rises faster than the tax size.
Tax revenue initially increases, then decreases.
Market Size:
Higher taxes drastically reduce market participation.
Page 12: Variations of Deadweight Loss and Tax Revenue
Tax Sizes Analysis (Panels a, b, c):
(a) Small tax: small deadweight loss.
(b) Medium tax: larger deadweight loss, larger revenue.
(c) Large tax: very large deadweight loss, low revenue due to reduced market.
Page 13: Summary of Tax Effects
General Observations (Panels d & e):
(d) Larger tax results in greater deadweight loss.
(e) Initial rise in tax revenue followed by a decline.
Important Concept:
This phenomenon illustrates the Laffer curve.
Page 14: Market for Pizza - Tax Implications
Task: Draw market for pizza including:
Supply and Demand curves.
Illustrate impacts of a $1 tax.
Notate changes in Consumer Surplus (CS), Producer Surplus (PS), Prices, Government Revenue, and Deadweight Loss.
Page 15: Inelastic Demand Curve Analysis
Task: Draw market with inelastic demand and apply a tax.
Mark effects on CS, PS, Deadweight Loss (DWL), and government revenue.