Consumption- Dead and supply assing Along a T How much tax does the supplier along to the consumer?( Sometimes called the tax pass-through) +t P+-t A perfectly inelastic supply curve results in the supplier paying all the tax. None of the tax is passed along In intermediate cases the tax burden is split with the consumer paying more the more elastic the supply curve. Denand and Supply Deadweight Loss The deadweight loss of a tax is the amount of surplus lost when the tax is imposed. It is a measure of its social cost. X The area a+b is th surplus lost. The area c+d is the producer lost. Th + is the government revenue raised. Hence, area b+d is simply being thrown away. This area is the deadweight lossConsumption — Demand and Supply 11 Passing Along a Tax • How much tax does the supplier pass along to the consumer? (Sometimes called the tax pass-through). ...................................................................................................................................................................................................................................................................................................................................... ........................................................................................................................................................................................................................................................................................................................................ . . . .................................................................................................................................................................................................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 P X 0 P X D2 D1 S D2 D1 S P ∗ P ∗ − t P ∗ P ∗ + t X∗ X∗ 1 • • • • • X∗ 2 ............. ............. ............. ............. ............. ........... ............. ............. ............. ............. ............. ........... . . . . . ............. ............. ............. ............. ............. ........... . . . . . . . • A perfectly inelastic supply curve results in the supplier paying all the tax. None of the tax is passed along. • A perfectly elastic supply curve results in the consumer paying all the tax. All the tax is passed along. • In intermediate cases the tax burden is split with the consumer paying more the more elastic the supply curve. Consumption — Demand and Supply 12 Deadweight Loss • The deadweight loss of a tax is the amount of surplus lost when the tax is imposed. It is a measure of its social cost. ................................................................................................................................................................................................................................................................................ . . .................................................................................. .................................................................................. ........................................................................................................................................ . . . . 0 t P X D S X∗ PD PS a c b d . . . . • The area a + b is the consumer surplus lost. The area c + d is the producer surplus lost. The area a + c is the government revenue raised. Hence, area b + d is simply being thrown away. This area is the deadweight loss