ECO 1104 : The cost of taxation.odt

• School: University of Ottawa
• Department: Economics
• Course: ECO 1104
• Professor: A L L

Document Summary

Taxes 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 shrink. If 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 well-being, we use tax revenue to measure the governments benefit from the tax. (8. 2) Welfare 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 curves.