EC120 Lecture Notes - Deadweight Loss, Market Distortion, Economic Equilibrium
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EC120 Full Course Notes
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Without tax, the equilibrium price is pe, and quantity is qe. When the government imposes a tax of per unit. Tax revenue is included in total surplus, because tax revenue can be used to provide services such as roads, education, etc. Cs = a + b + c cs = a. Ps = d + e + f ps = f. Ts = a + b + c + d + e + f a + b + d + f. Tax revenue after tax = b + d. Deadweight loss: ts falls by c + e. Results from a market distortion, such as a tax fall in ts. Value of the units c + e to buyers is greater than the cost of. Losses to buyers/sellers exceed the revenue raised by government producing them, so the tax has prevented some mutually beneficial trades.