EC120 Chapter Notes - Chapter 8: Laffer Curve, Deadweight Loss, Market Distortion

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EC120 Full Course Notes
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Buyers and sellers share the burden of tax. The benefit received by buyers is measured in consumer surplus. The benefit received by sellers in a market is measured by producer surplus. Total tax revenue = t x q = size of tax x quantity of goods sold. Is the total amount within the left side of the supply and demand graph. With tax: price received by sellers falls, producer surplus falls, quantity sold falls, tax revenue increases. Therefore the loss of buyers and sellers exceed the government. Deadweight loss: the fall in total surplus that results from a market distortion, such as tax. With taxes the size of the market shrinks below its optimum. Taxes causes deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. The deadweight loss is the surplus lost because the tax discourages these mutually advantageous trades.

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