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Nov 2 2013.docx

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David Gray

nd ECO 1104 B Nov. 2 , 2013 YUJIE YI #7038840 - Government tax: the shrinking revenue factor - C + E: the deadweight loss - People hiding within the government, and their benefit should be taken into consideration as well. That’s why the tax should be considered into the TR. Deadweight Loss  Deadweight loss = NET loss in total surplus after the tax has been implemented  The NET effect total surplus is always negative, as the gains realized by the government are outweighed by the losses of both demanders and suppliers.  Why a loss in welfare? - Lower equilibrium quantity (a shrink in market size) - In Chapter 7, it was shown that the free market equilibrium Q was efficient, but now we are producing at a lower quantity - In other words, taxes choke off private sector activity that would otherwise occur  Currently the Republican Party in the USAis singing this hymn of “job- killing taxes are wicked” from the rooftops.  This is not an argument against taxation, because taxes are required in order to finance government services. (But tax revenue is NOT INFINITE)  It is an argument that tax revenue is NOT FREE – that is does have consequences on economic activity - Depending on the type of tax, it is estimated that perhaps every $1.00 of revenue raised causes a decline of $1.40 of welfare in the private sector - This if true even when the taxes are paid by the “rich”  Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from exchange - Demonstrated in Figure 8-4 - In the range from Q1 to Q2, consumers’valuation (height of D curve) exceeds suppliers’opportunity cost of producing (height of S curve), so a mutually beneficial trade does not occur.  What behind the demand curve is the Consumer Taste  Consumers’valuation is the willingness to buy (height of D curve); the willingness of suppliers to sell depends on the cost, which refers to the opportunity cost of producing (height of S curve).  Figure 8-4: The Deadweight Loss  Cost to sellers is the valuation whether suppliers will sell the product. Size of the Deadweight Loss  What determines whether the deadweight loss from a tax is large or small
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