CAS EC 101 Study Guide - Midterm Guide: Economic Surplus, Demand Curve, Deadweight Loss

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: Neil Watson

Document Summary

Review points: 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, and reduces the quantity bought and sold. Same whether the tax is imposed on the buyers or sellers. Revenue of tax = size of tax multiplied by the quantity taxed. Without a tax: cs = area above the price under the demand curve, ps = area below the price above the supply curve, ts = cs + ps. The area of the wedge is called the deadweight loss (dwl) of the tax = the. Because of the tax, units between q t and q e are not sold. The value of these units to buyers is greater than the cost of producing them, so the tax prevents some mutually beneficial trades. The goods/services the gov. should tax to raise the needed revenue are those w/ the smallest dwl.