01:960:211 Lecture Notes - Lecture 8: Deadweight Loss, Economic Surplus, Marginal Utility

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Tax incidence: division of the burden of a tax between the buyer and the seller. When a good is taxed, it has two prices, Taxes place a wedge between the buyer"s price (marginal benefit) and the seller"s price (marginal cost) The equilibrium quantity is less than the efficient quantity and a deadweight loss arises. The loss of consumer surplus and producer surplus is the burden of the tax. Burden of the tax = tax revenue + deadweight loss. Excess burden: the deadweight loss from the tax. As the consumer pays more of the tax, the demand of a good becomes more inelastic. As the seller pays more of the tax, the supply of the good becomes more inelastic. Excess burden is smaller, the more inelastic is the supply orrrrr the demand. Perfectly inelastic demand= buyer pays more and is efficient. Perfectly elastic demand= seller payers more and is inefficient. Perfectly inelastic supply= sellers pay more and is efficient.

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