COMMERCE 1B03 Chapter Notes - Chapter 8: Black Market, Deadweight Loss, Laffer Curve
4 Feb 2014
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Taxes drives a wedge between the price buyers pay and the price sellers receive. The area c + e represent deadweight loss due to decreased quantity sold and bought. Governments should talk goods that result in the smallest deadweight loss. Dwl is determined by the elasticity of the good. Bigger governments provide more services, but charge higher taxes, increasing dwl. The larger the dwl from taxation, the more request for a smaller government. Tax on labour income is the largest source of government revenue. Marginal tax rate the tax on the last dollar of earning (typically 40%) If labour supply is inelastic, dwl is small (mostly inelastic) Other economics think that labour taxes are highly distorting because some groups of workers have elastic supply and can respond to incentives (overtime, second earner in family, late retirement, underground economy) Doubling taxes causes the dwl to increase more than double. Raises taxes cause dwl to increase exponentially increases.
