EC120 Lecture Notes - Lecture 7: Laffer Curve, Dwls, Tax Rate

• School: WLU
• Department: Economics
• Course: EC120
• Professor: Amjad Rabi

Document Summary

Drives a wedge b/w the price the buyers pay (pb) and the price the sellers receive (ps) Raises the price paid by the buyers and lowers the price sellers receive. Reduces the quantity bought and sold (qd and qs) Step 1: find equilibrium with and without tax: Equilibrium with no tax: price = pe, quantity = qe. Apply welfare economics to measure the gains and losses from a tax. Determine consumer surplus (cs), producer surplus (ps), tax revenue, and total surplus with and without tax. Tax revenue can fund beneficial services so we include it in total surplus. Cs = a + b + c. Ps = d + e + f. Tax reduces the total surplus by: c + e. C + e is called the deadweight loss (dwl) of the tax. The fall in total surplus resulting from a market distortion (ex: tax) Dwl is the sum of the area of the inside triangles formed after tax.