ECON 1 Lecture Notes - Lecture 8: Deadweight Loss, Economic Surplus, Dwls
ECON 1: Chapter 8 Notes
Focus Questions:
• How does a tax affect consumer surplus, producer surplus, and total surplus?
• What is the deadweight loss of a tax?
• What factors determine the size of this deadweight loss?
• How does tax revenue depend on the size of the tax?
Review from Chapter 6
▪ A tax
▪ drives a wedge between the price buyers pay and the price sellers receive.
▪ raises the price buyers pay and lowers the price sellers receive.
▪ reduces the quantity bought & sold.
▪ These effects are the same whether the tax is imposed on buyers or sellers, so we do not make this
distinction in this chapter.
The Effects of a Tax
• Next, we apply welfare economics to measure the gains and losses from a tax.
• We determine consumer surplus (CS), producer surplus (PS), tax revenue, and total surplus with and
without the tax.
• Tax revenue can fund beneficial services (e.g., education, roads, police), so we include it in total surplus.
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