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EC120 (343)
Chapter 8

Chapter 8 EC120.docx

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Wilfrid Laurier University
Peter Sinclair

EC120 Chapter 8Application The Costs of Taxation Week 5 Taxes are a way that the government can help improve market outcomesThe Deadweight Loss of Taxation It does not matter whether a tax on a good is levied on buyers or sellers of the good In the end buyers and sellers share the burden of the tax regardless of how it is levied One curve must shift when a tax is imposed which curve shifts depends on whether the tax is levied on sellers the supply curve shifts or buyers the demand curve shifts We can simplify the graphs by not bothering to show the shift The tax places a wedge between the price buyers pay and the price sellers receive A tax on a good causes the market of the good to shrink How a Tax Affects Market Participants We must take into account how the tax affects buyers sellers and government The benefit received by buyers in a market is measured by consumer surplusthe amount buyers are willing to pay for the good minus the amount they actually pay for it The benefit received by sellers in a market is measured by producer surplusthe amount sellers receive for the good minus their costs The third party the government receives Ttax x Q quantity sold Welfare without Tax Without a tax the price and quantity are found at the intersection of the supply and demand curves Welfare with a Tax Changes in Welfare Deadweight lossthe fall in total surplus that results from a market distortion such as a tax
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