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The cost of taxation.odt

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Application The Cost of TaxationTHE DEADWEIGHT LOSS OF TAXATIONTaxes place a wedge between the price buyers pay and price sellers receive Because of this wedge the quantity sold falls below the level that would be sold without a tax In other words a tax on a good causes the size of the market for the good to shrinkHow a Tax Affects Market ParticipantsIf T is the size of the tax and Q is the quantity of the good sold then the government gets total tax revenue of T x Q It can use this tax revenue to provide services or to help the needy Therefore to analyze how taxes affect economic wellbeing we use tax revenue to measure the governments benefit from the tax 82Welfare Without a Tax To see how tax affects welfare we begin by considering welfare before the government has imposed a tax Without a tax the price and quantity are found at the intersection of the supply and demand curvesThe price is P1 and the quantity sold is Q1 Total surplus is the area between the demand and supply curve up to the equilibrium quantity Welfare With a Tax The price paid buy the buyers rises from P1 to Pb so consumer surplus equals only area A Area below demand curve and above buyers price The price received by sellers falls from P1 to Ps so producer surplus is equal to area F Above supply curve and below sellers price The quantity sold falls from Q1 to Q2 and the government collects tax revenue equal to the area BD To compute total surplus with the tax we add consumer surplus producer surplus and tax r
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