Chapter 8 - Application: the Costs of Taxation

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Drives a wedge between the price buyers pay and the price sellers receive. raises the price buyers pay and lowers the price sellers receive. reduces the quantity bought & sold. these effects are the same whether the tax is imposed on buyers or sellers, so we do not make this distinction in this chapter. next, we apply welfare economics to measure the gains and losses from a tax. we determine consumer surplus (cs), producer surplus (ps), tax revenue, and total surplus with and without the tax. tax revenue can fund beneficial services (e. g. , education, roads, police) so we include it in total surplus. one answer: those with the smallest dwl. Turns out it depends on the price elasticities of supply and demand. The price elasticity of demand (or supply) measures how much qd (or qs) changes when p changes. a bigger government provides more services, but requires higher taxes, which cause dwls.

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