ECO 1104 Study Guide - Midterm Guide: Pigovian Tax, Deadweight Loss, Laffer Curve

• School: University of Ottawa
• Department: Economics
• Course: ECO 1104
• Professor: Gordon Lenjosek

Document Summary

Efficient allocation of resources = total surplus is maximized. The losses to buyers & sellers from a tax exceed the revenue raised by the government. Tax revenue = area of rectangle between supply and demand curves. Tax imposed on a market with elastic demand & inelastic supply sellers bear tax. Tax imposed on a market with inelastic demand & elastic supply consumers bear tax. *the more elastic the demand/supply curve, the greater the reduction in equilibrium quantity* Corrective tax (pigovian tax) = external cost of negative externality (ideal) Regulation requiring firms to reduce pollution by a specific amount is not efficient. When market participants must pay social costs, market equilibrium = the social optimum. The tax on sellers has internalized the externality. At any lower quantity, the social value of additional units exceeds their cost. At any higher quantity, the cost of the last unit exceeds its social value.