Atax on a good causes the size of the market for the good to shrink.
The benefit received by buyers in a market is measured by consumer surplus; the
benefit received by sellers in a market is measured by the producer surplus.
Government: gets (T x Q) size of tax times quantity of good sold = total tax revenue
Then spends to provide public services.
Deadweight loss: fall in total surplus that results from a market distortion (tax).
Change in consumer surplus + change in producer surplus +change in tax
Incentives: raise price-buyers buy less and suppliers supply less-shrink market
The greater the elasticities of supply and demand, the greater the deadweight
loss of a tax.
• Elastic + tax