ECON1020 Lecture Notes - Lecture 6: Import Quota, Autarky, Takers
Document Summary
Week 6 government failure: the costs of taxation. Government failure government failure happens when government intervention fails to correct or exacerbates market failure. Some causes: the cost of intervention may exceed the benefit: government information failure (unable to conduct proper cost-benefit analysis, non-public (vested) interest, perceptions of paternalism regulatory capture. Without tax, the market equilibrium is the intersection of demand and supply. Consumer surplus is the area below the demand curve and above the equilibrium price. Producer surplus is the area below the equilibrium price and above the supply curve. Total surplus is maximised (i. e. economic welfare maximised) The tax creates a wedge between the price paid by buyers, and the price received by sellers. The price buyers pay rises, and the price sellers receive falls. The quantity traded is lower than in the equilibrium without tax. The deadweight loss of taxation is the area of the triangle between demand, supply and the quantity with tax.
