Class Notes (808,126)
Canada (493,084)
Economics (1,618)
ECON 1B03 (520)

Econ 1B03 - Chapter 6&8 Part 3.docx

8 Pages
Unlock Document

McMaster University
Hannah Holmes

Richard Damra Thursday, February 14, 2013 Econ 1B03 – Chapter 6&8 – Supply, Demand & Government Policies Chapter 8 The Deadweight Loss of Taxation – Ch 8  Note: Taxes, whenever there is per unit sales tax it’s going to decrease the quantity traded in the market and whenever we are not in market equilibrium there will be deadweight loss.  Since a tax places a burden on consumers and suppliers and reduces the quantity traded in the market compared to the non-tax equilibrium quantity, we know there will be a deadweight loss.  The government’s tax revenues are a benefit for them and a benefit for the recipients when the government spends that revenue on social programs.  But ultimately, consumers and producers lose out. Changes in Welfare  A tax on a good reduces consumer surplus and producer surplus  On the following diagram, total surplus is the area of ABC CS and PS Before the Tax   A tax reduces the quantity traded, increases the price consumers pay and decreases the price suppliers receive.  The new CS is Triangle A on the following diagram  The new PS is Triangle F.  The tax revenue is the sum of rectangle B (Lost CS) and rectangle D (Lost PS) CS and PS After the Tax  C and E are dead weight loss  A and F are consumer/producers surplus after tax revenue Richard Damra Thursday, February 14, 2013  Determinants of DWL due to Tax  What determines the size of the deadweight loss from tax? o Price elasticity of demand + supply o Size of the tax  The following examples show what happens to deadweight loss when the size of the tax remains the same and the  Demand curve is the same but supply elasticity changes.  Supply curve is the same but demand elasticity changes.  Inelastic Supply o  Elastic Supply o Richard Damra Thursday, February 14, 2013  Elastic Demand o  Inelastic Demand o  The greater the elasticities of demand and supply: o The greater the decrease in equilibrium quantit o Greater the DWL of a tax  With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.  Consider the following 3 diagrams:  A Smaller Tax: o Richard Damra Thursday, February 14, 2013  Larger Tax o o Government is making more per unit in this market  An even Larger Tax o  For the small tax, tax revenue is small.  As the size of the tax rises, tax revenue grows.  But as the size of the tax continues to rise, tax revenue falls because the higher tax reduces the size of the market. Working with Equations  Market for pizzas is represented by the following equations for demand and supply” o Qd = 20 – 2P o Qs = P – 1 o Eqm = Qd = Qs o 20 – 2P = P – 1 o P = $7 o Q = 6  Now suppose a tax on trans fats results in $3 tax per pizza for pizza firms  The new supply curve is o Qs = P – 4  For consumers, Pc is determined where the new Qs = Qd o P – 4 = 20 – 2P o P = $8 Richard Damra Thursday, February 14, 2013  For pizza firms, we need to know what the new Q will be first, and then we can solve for the price they receive.  To find Q, substitute P = 8 into either the new Qs or Qd: (I’l
More Less

Related notes for ECON 1B03

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.