Textbook Notes (368,440)
Canada (161,878)
Economics (747)
ECON 1B03 (303)
Chapter 8

Chapter 8

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Department
Economics
Course
ECON 1B03
Professor
Usman Hannan
Semester
Fall

Description
CHAPTER 8: APPLICATION – THE COSTS OF TAXATION The Deadweight Loss of Taxation How a Tax Affects Market Participants - government gets a tax revenue of T x Q (where T is the size of the tax and Q is the quantity of the taxed good sold) - can be represented in the graph as the area (rectangle) between supply and demand curves Welfare Without a Tax - surplus for both buyers and sellers, no tax revenue Welfare With a Tax - surplus for buyers and sellers drop, total surplus drops, tax revenue increases Changes in Welfare - deadweight loss: the fall in total surplus that results from a market disorientation - the losses to buyers and sellers from a tax exceed the revenue raised by the government - taxes distort incentives and cause markets to allocate resources inefficiently Deadweight Losses and the Gains from Trade - taxes cause deadweight losses because they prevent buyers and sellers from realizing
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