101-Chapter 8 (1)

POWERPOINT PRESENTATIONS FOR PRINCIPLES OF MICROECONOMICS

  • Edition: Eighth Canadian Edition by Mankiw/Kneebone/McKenzie

  • Adaptation: Adapted by Marc Prud’Homme, University of Ottawa

  • Copyright: © 2020 by Nelson Education Ltd.

APPLICATION: THE COSTS OF TAXATION

  • Chapter: 8

UNDERSTANDING THE COSTS OF TAXATION

  • To assess how taxes impact economic welfare:

    • Compare reduced welfare of buyers/sellers to government revenue.

    • Use tools of consumer and producer surplus for comparison.

THE DEADWEIGHT LOSS OF TAXATION

  • Effect of Taxation on Demand/Supply:

    • Tax on buyers = Demand curve shifts downward by tax size.

    • Tax on sellers = Supply curve shifts upward by tax size.

  • Outcome of Taxation:

    • Price paid by buyers increases.

    • Price received by sellers decreases.

    • Buyers and sellers share the tax burden.

GRAPHICAL REPRESENTATION OF TAX IMPACT

  • Figure 8.1: Illustrates effects of a tax on price and quantity.

    • Price, supply, demand, and quantity changes depicted when tax is applied.

TAXATION IN A MARKET SCENARIO

  • Diagram Exercise:

    • Draw supply and demand curves for cookies.

    • Show impact of government tax on:

      • Quantity sold

      • Price paid by buyers

      • Price received by sellers

    • Include deadweight loss in diagram.

DETERMINANTS OF DEADWEIGHT LOSS

  • Factors influencing deadweight loss size:

    • Price elasticities of supply and demand.

    • Measures responsiveness of quantity supplied/demanded to price changes.

ELASTICITY AND DEADWEIGHT LOSS

  • Figures 8.5 (a-d): Illustrate the relationship between elasticity and deadweight loss.

    • Inelastic Supply = Small deadweight loss.

    • Elastic Supply = Large deadweight loss.

    • Inelastic Demand = Small deadweight loss.

    • Elastic Demand = Large deadweight loss.

QUICK QUIZ ON DEADWEIGHT LOSS

  • Inquiry: Tax on beer (more elastic) vs. tax on milk (less elastic)—assess which leads to larger deadweight loss.

VARIATION IN DEADWEIGHT LOSS AND TAX REVENUE

  • Investigates impact of changing tax size on deadweight loss and tax revenue.

GRAPHICAL ANALYSIS OF TAX REVENUE

  • Figure 8.6: Shows relationship between deadweight loss and tax revenue across different tax sizes.

IMPACT OF TAX INCREASES

  • Figure 8.7: Details effects of a tax increase on price and quantity.

  • Price effects illustrated when tax is raised.

SOCIETAL COST OF TAXES

  • Total societal cost of tax:

    • Revenue generated + Deadweight loss.

  • Marginal Cost of Public Funds (MCPF):

    • Cost to society for raising additional tax revenue.

    • Dependent on tax base sensitivity to tax changes.

GOVERNMENT SIZE AND TAXATION COST

  • Considerations for government size:

    • Larger deadweight loss leads to increased costs of government programs.

    • Efficient taxation (small deadweight loss) allows for potentially lower tax burdens.

MARGINAL BENEFIT OF PUBLIC FUNDS

  • Identifies societal value of increased government expenditure:

    • Expenditure to continue if Marginal Cost (MCF) = Marginal Benefit (MBF) reaches equilibrium.

GOVERNMENT TAXATION EXAMPLE

  • Inquiry regarding a potential doubling of gasoline tax:

    • Discuss uncertainty in revenue increase and deadweight loss implications.

LABOUR TAXES CLASSROOM ACTIVITY

  • Scenario: Earning $10/hour with varying tax rates (10% - 100%).

    • Consider decision to quit or continue working at different tax rates.

    • Exploration of what constitutes the “best” tax rate.

CONCLUSION

  • End of Presentation.