ECON-221 Lecture Notes - Lecture 16: Deadweight Loss, Market Clearing, Tax Incidence
Document Summary
Taxes are very prevalent in societies in a well functioning market, taxing something is a bad thing: product markets (vat; sales tax, labour markets (income taxes, payroll taxes, capital markets (capital gains taxes) How do takes impact markets: some taxes can correct market failures, in general they distort market outcomes (for better or worse) In equilibrium, the market clearing quantity is that consistent with consumers paying pb and suppliers receiving pb t: taxes introduce a wedge between these two prices. Change in prices happens on both sides impact on both consumers and producers. Tax revenue = unit tax times number of units we assume this does back to the people and does not disappear. Why is there a deadweight loss? of existence the very action they want to tax. A tax destroys some of the transactions a government wants to tax; taxes tax out. Distortionary taxes = taxes that cause agents to change their behaviour.
