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 = 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
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