ECON 112 Lecture Notes - Lecture 8: Laffer Curve, Arthur Laffer, Deadweight Loss

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8 Oct 2015
Department
Course
Application:+The+Costs+of+Taxation
By#the#size#of#tax
1)
Demand#curve#shifts#leftward
i.
Tax#on#a##good#levied#on#buyers
a.
By#the#size#of#tax
1)
Supply#curve#shifts#leftward
i.
Tax#on#a#good#levied#on#sellers
b.
i.
Price#paid#by#buyers#rises
ii.
Price#received#by#sellers#falls
iii.
Lower#quantity#sold
iv.
Inelastic#=#low#tax
v.
Elastic#=#high#tax
vi.
Tax#on#a#good#levied#on#buyers#or#on#sellers
c.
Distributed#between#producers#and#consumers
i.
Determined#by#elasticities# of#supply#and#demand
ii.
Tax#burden
d.
Smaller#
i.
Market#for#the#good
e.
Buyers:#consumer#surplus
i.
Sellers:#producer#surplus
ii.
Tax#times#quantity#sold
1)
Public#benefit#from#the#tax
2)
Government:#total#tax#revenue
iii.
Economic#welfare
f.
i.
Consumer#surplus#=#A,B,C1)
Producer#surplus#=#D,#E,#F2)
Without#Taxii.
Consumer#surplus#=#A1)
Producer#surplus#=#F2)
Tax#revenue#=#B,#D3)
Deadweight#loss#=#C,#E4)
With#taxiii.
Welfare#with#and#without
g.
Exceed#the#revenue#raised#by#the#governmenti.
Losses#of#surplus#to#buyers#and#sellers,#from#a#taxh.
Fall#in#total#surplus#that#results#form#a#market#distortion,#such#as#a#
tax
i.
Deadweight#lossi.
Taxes#distort#marketsj.
Prevent#buyers#and#sellers#from#realizing#some#of#the#gains#
from#trade
1)
Taxes#cause#deadweight#lossesi.
Difference#between#buyers'#value#and#sellers'# cost#are#less#
than#the#tax
1)
Some#traders#are#not#madea)
Once#the#tax#is#imposed2)
The#gains#from#tradeii.
Deadweight#losses#and#gains#from#tradek.
Deadweight#Loss#of#Taxation
I.
Larger#deadweight#loss1)
More#elastic#supply#curvei.
Larger#deadweight#loss1)
More#elastic#demand#curveii.
Price#elasticities#of#supply#and#demanda.
The#greater#the#elasticities#of#supply#and#demand#the#great#the#dead#
weight#loss#of#a#tax
b.
High#elasticity#means#that#if#the#price# changes#there#is#a#high#change#in#
quantity#so#when#the#curves#are#elastic# buyers#and#sellers#will#stop#when#
there#is#a#tax,#so#less#gov.#revenue,#more#deadweight#loss
c.
The#Determinants#of#the#Deadweight#LossII.
Even#more#rapidly#than#the#size#of#the#tax1)
Increases#initiallya)
Higher#tax:#drastically#reduces#the#size#of#the#
market
i)
Then#decreasesb)
Tax#revenue2)
Deadweight#loss#increasesi.
Look$at$Figure$6$in$notesii.
As#the#tax#increasesa.
Deadweight#Loss#and#Tax#Revenue#as#Taxes#VaryIII.
Economist#Arthur#Laffer#1974i.
SupplyZside#economicsii.
Tax#rates#were#so#high,#that#reducing#them#would#actually#raise#tax#
revenue
iii.
Laffer#Curvea.
ConclusionIV.
Chapter(8
Friday,#October#2,#2015
1:18#PM
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