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Lecture 12

ECON 1000 Lecture 12: Week 6

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ECON 1000
Nick Rowe

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Econ 1000 – Week 6 – Lecture 12  Chapter8  Governmentsneedrevenuein orderto payfor thingsit buys(army, doctors,legal system..etc)  That’swhywe havetaxes  Deadweightloss is amountofpossibleincomelostfrom tax,taxes haveexcess losses,becauseit affects incentives.  To make an efficienttax policyyou wantto minimizedeadweightloss for anygiven taxrevenue.  In perfectlyinelasticsupplycurves,sellersbare 100% ofthe taxation cost.  Alsoquantitysuppliedisnotaffectedwhich means youmake a nice amountoftaxrevenue(bigger rectangle)alsoyouminimize deadweightloss.  Taxesaffect behavior  If youtax somethingyoureduce totalsurplusbecausethereis less buyingandselling.  The lessthe elasticityofthe sellercomparedto the demandcurve there is a bigger burdenoftaxationtobareonthe supplycurve.  Propertytaxescan be an exampleofa 100% taxburden  Triangle-deadweightloss,rectangle-taxrevenue  If taxesare toohigh it creates a disincentivetobuy,so youare actually losingquantityoftaxrevenue, i.eless peoplearebuyingbecause taxes are toohigh.  The laffer curve – thecurve thatidentifiestherelationshipbetween taxrevenue andtaxes.  A move from the right tothe left on thelaffer curve can be described as a paretoimprovement.  Inelasticityisa way todescribe howvariablesdon’treallyaffectbuying behavior.
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