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Economics for Management Studies

ECMC31 TOPIC 3 EFFICIENCY COST OF TAXES 1. Terms and Concepts 2. Defining Excess Burden using Taxes on Consumption 1. TERMS AND CONCEPTS 3. Connecting Elasticity and Excess Burden 4. Producer Surplus and Excess Burden 5. Excess Burden of Taxes on Labour 6. Excess Burden of Taxes on Capital 7. GE Estimation of Excess Burden LEARNING OBJECTIVES 1. How to show the excess burden of a tax using graphical analysis 2. How to calculate the excess burden of a tax mathematically 1 2 Basic terms and ideas tax welfare = utility social welfare = everyones utility together increases factor prices all forms of taxation cause a welfare loss causes a drop in causes rndources to capacity to produce shift to 2 best uses most forms of taxation cause a welfare loss even if all tax revenue given back recoverable unrecoverable output loss output loss excess burden (EB) = deadweight loss (DWL) = an unrecoverable welfare loss recoverable unrecoverable utility loss utility loss = EB excess burden tax increases consumer prices EB = loss of utility, which we cannot measure, so we use this definition in theoretical analysis only causes a drop in causes condumption to capacity to buy shift to 2 best choices in practical analysis we will measure EB as recoverable unrecoverable o loss of incomeGDP ($) utility loss utility loss = EB o loss of surplus ($) 3 4 www.notesolution.com A unit tax on consumption good X 2. EXCESS BURDEN OF TAXES ON CONSUMPTION R = tax revenue = (P y )(amount of Y taken as tax) R = ( )(amount of X purchased after tax) 5 6 A lump sum tax Comparing a commodity tax and a lump sum tax a fixed amount of tax e.g. $1000 taken whether person is rich or poor tax revenue = $1000 amount of Y taken as tax = $1000 Py the lump sum tax is set to take the same revenue as the commodity tax 7 8 www.notesolution.com
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