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Lecture

Chapter 8 The Costs of Taxation

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Department
Economics
Course
EC120
Professor
petersinclair
Semester
Fall

Description
Keith Diaz Chapter 8 - The Costs of Taxation  Without tax, the equilibrium price is PE, and quantity is QE  When the government imposes a tax of $T per unit - The price buyers pay is PB - The price sellers receive is PS - The quantity demanded/sold is Qr - The tax revenue = T x Qr Total Surplus  Tax revenue is included in total surplus, because tax revenue can be used to provide services such as roads, education, etc. Without a tax  with a tax  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 Deadweight Loss  Results from a market distortion, such as a tax fall in TS  Losses to buyers/sellers exceed the revenue raised by government  Value of the units C + E to buyers is greater than the cost of producing them, so the tax has prevented some mutually beneficial trades  The goods/services with the smallest deadweight loss are taxed depends on elasticity of S & D - Inelastic supply/demand = small deadweight loss - Elastic supply/demand = large deadweight loss - tax causes less Q, so elasticity determines how MU
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