Application the Costs of taxation C Chapter 8
Application: the Costs of Taxation Chapter 8
The Cost of taxation e how do taxes affect the economic well eing of market participants? b o It does not matter whether a tax on a good is levied on buyers or sellers of the good the price paid by buyers rises, and the price received by sellers falls
The Cost of Taxation • How do taxes affect the economic wellbeing of market participants? • It does not matter whether a tax on a good is levied on buyers or sellers of the good… the price paid by buyers rises, and the price received by sellers falls
The effects of a tax Price Suppl Price buyers Size of tax pay Price without tax Price sellers eive D eman d 0 Quantity Quantity without Quantity with tax tax
The Effects of a Tax... Price 0 Quantity without Quantity tax Supply Demand Price without tax Price buyers pay Quantity with tax Size of tax Price sellers receive
The effects of a tax a tax places a wedge between the price buyers pay and the price sellers receive Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax The size of the market for that good shrinks
The Effects of a Tax • A tax places a wedge between the price buyers pay and the price sellers receive. • Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax. • The size of the market for that good shrinks
Tax revenue T= the size of the tax Q= the quantity of the good sold TxQ=the government's tax revenue
Tax Revenue T = the size of the tax Q = the quantity of the good sold TQ = the government’s tax revenue
Taⅹ Revenue Price upply Price buvers Size of tax t) pay Tax Revenue ( TXQ Price sellers receive ■■m■m■ Quantity Demand sold(Q) 0 Quantity quantity without Quantity with tax tax
Tax Revenue... Price 0 Quantity without Quantity tax Supply Demand Price sellers receive Quantity with tax Size of tax (T) Quantity sold (Q) Tax Revenue (T x Q) Price buyers pay
How a tax Affects Welfare Tax reduces consumersurplus by (B+C)and producer surplus by (d+e) Price Tax revenue=(B+D) buvers A Supply a B… B Pric without P1 Deadweight LOSs =(C+E) tax D E Price P S·… sellers F ■■ receive ■ Demand 0 Q1 Quantity
How a Tax Affects Welfare... 0 Quantity Price Demand Supply Q1 A B C F D E Q2 Tax reduces consumer surplus by (B+C) and producer surplus by (D+E) Tax revenue = (B+D) Deadweight Loss = (C+E) Price buyers pay = PB P1 Price without tax = Price PS sellers receive =
Changes in Welfare rom a lax Without tax With tax Change Consumer Surplus A+B+C Producer Surplus D+E+F AF (B+C) (D+E) Tax Revenue none B+D (B+D) otal surp The area C+E shows the fall in total surplus is the deadweight loss of the tax
Changes in Welfare from a Tax Without Tax With Tax Change Consumer Surplus A + B + C A - (B + C) Producer Surplus D + E + F F - (D + E) Tax Revenue none B + D + (B + D) Total Surplus A + B + C + D + E + F A + B + D + F - (C + E ) The area C+E shows the fall in total surplus is the deadweight loss of the tax
How a tax affects welfare The change in total welfare includes o The change in consumer surplus The change in producer surplus The change in tax revenue o The losses to buyers and sellers exceed the revenue raise by the government The fall in total surplus is called the deadweight loss
How a Tax affects welfare • The change in total welfare includes: • The change in consumer surplus. • The change in producer surplus. • The change in tax revenue. • The losses to buyers and sellers exceed the revenue raise by the government. • The fall in total surplus is called the deadweight loss
Deadweight Loss and the Gains from trade o Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade
Deadweight Loss and the Gains from Trade • Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade
