1
1. Terms and Concepts
2. Defining Excess Burden
using Taxes on Consumption
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
ECMC31 TOPIC 3
EFFICIENCY COST OF TAXES
2
1. TERMS AND CONCEPTS
3
Basic terms and ideas
welfare = utility
social welfare = everyones utility together
all forms of taxation cause a welfare loss
most forms of taxation cause a welfare loss
even if all tax revenue given back
excess burden (EB) = deadweight loss (DWL)
= an unrecoverable welfare loss
excess burden
tax
increases consumer prices
causes a drop in causes consumption to
capacity to buy shift to 2nd best choices
recoverable unrecoverable
utility loss utility loss = EB
4
tax
increases factor prices
causes a drop in causes resources to
capacity to produce shift to 2nd best uses
recoverable unrecoverable
output loss output loss
recoverable unrecoverable
utility loss utility loss = EB
EB = loss of utility, which we cannot measure,
so we use this definition in theoretical
analysis only
in practical analysis we will measure EB as
o loss of income/GDP ($)
o loss of surplus ($)
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5
2. EXCESS BURDEN
OF TAXES ON CONSUMPTION
6
A unit tax on consumption good X
R = tax revenue = (Py )·(amount of Y taken as tax)
R = (τ )·(amount of X purchased after tax)
7
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
8
Comparing a commodity tax and a lump sum tax
the lump sum tax is set to take the same revenue
as the commodity tax
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9
Uo Uc = welfare loss due to effect on income
(i.e. loss of purchasing power)
from either tax
Uc - UA = excess burden of the commodity tax
10
Giving the commodity tax revenue back
11
Uo UF = an alternate measure of excess burden
= an unrecoverable loss of welfare
due to the price distortion from the tax
12
An income measure of excess burden
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Document Summary

Producer surplus and excess burden: excess burden of taxes on labour, excess burden of taxes on capital, ge estimation of excess burden. How to show the excess burden of a tax using graphical analysis: how to calculate the excess burden of a tax mathematically. Eb = loss of utility, which we cannot measure, so we use this definition in theoretical analysis only in practical analysis we will measure eb as: loss of income/gdp ($, loss of surplus ($) A unit tax on consumption good x: excess burden. R = tax revenue = (py ) (amount of y taken as tax) R = ( ) (amount of x purchased after tax) Comparing a commodity tax and a lump sum tax. Uo uc = welfare loss due to effect on income (i. e. loss of purchasing power) from either tax. Uc - ua = excess burden of the commodity tax. Uo uf = an alternate measure of excess burden.

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