Econ ch 8
Suppose the tax on gasoline is decreased from .60 per gallon to .40 per gallon. Result,
DWL of tax necessarily decreases
For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is
$2,250 (15x300/2)
Tax on a good levied on buyers or on sellers
-Same outcome: a price wedge -Price paid by buyers - rises -Price received by sellers - falls -Lower quantity sold
Suppose the govt is considering levying a tax in 1 or more markets. Whick market min the DWL from the tax?
B (demand is very inelastic) D (Supply is very inelastic)
The price elasticities of supply and demand affect
Both the size of the DWL from a tax and tax incidence
As a tax on a good increases from $1 per unit to $2 per unit to $3 per unit
Tax revenue increases at first, but eventually peaks and then decreases
Tax on a good levied on sellers
The supply curve shifts upward by the size of the taxes
Ladder curve relates
The tax rate to tax revenue raised by tax
What happens to the total surplus in a market when the government imposes a tax?
Total surplus decreases
The size of the deadweight loss generated from a tax is affected by the
elasticities of both supply and demand
When a tax is imposed on a good, the
equilibrium quantity of the good always decreases
tax burden
falls more heavily on the side of the market that is less elastic
To fully understand how taxes affect economic well-being, we must compare the
reduced welfare of buyers and sellers to the revenue raised by the government
When a tax is placed on a product, the price paid by buyers
rises, and the price received by sellers falls
tax revenue
tax x quantity
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Area below DC and above Price
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it. Price received - willingness to sell. Area below Price above SC
Tax on a good levied on buyers
the demand curve shifts downward by the size of the tax
Labor taxes may distort labor markets greatly if
the number of hours many part time workers want to work is very sensitive to the wage rate