ECON201 1st Edition Lecture 14Outline of Last Lecture I. Taxes on Buyersa. Definition of tax incidenceII. Taxes on SellersIII. Who Will Bear the Burden of a Tax?a. Definition of elasticIV. Welfare Economicsa. Definition of welfare economicsb. Definition of consumer surplusc. Definition of producer surplusV. How Price Changes Affect Consumer and Producer SurplusOutline of Current Lecture I. Measures of Surplusa. Definition of total surplusII. Evaluating the Market EquilibriumIII. Government Interventiona. Definition of laissez-faireIV. Effects of TaxesV. Deadweight LossCurrent LectureI. Measures of SurplusRecall that consumer surplus is the difference between the value to buyers and the amount paidto buyers. Consumer surplus measures the benefit to buyers. Producer surplus is the difference between the amount received by sellers and the cost to sellers. Likewise, producer surplus measures the benefit to sellers. The total surplus is the combined total of the consumer surplus and the producer surplus. This value shows the total gains from trade in a market. This can also be calculated by the finding the difference between the value to buyers and the cost to sellers. II. Evaluating the Market EquilibriumIt is important to evaluate the market equilibrium to determine whether or not the market outcome is efficient. In the example below, the equilibrium price is $15 and the equilibrium quantity is 15,000 units. The total surplus of the market is equal to the consumer surplus plus These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.the producer surplus. In this example, the market equilibrium is the most efficient outcome because it is maximized. III. Government InterventionCan the government raise the total surplus in a competitive market? No, it cannot. This is reinforced by the belief of laissez-faire, the notion that the government should not interfere with the market. IV. Effects of TaxesIn the first diagram below, the market does not have a tax imposed upon it. The consumer surplus is equal to the combined areas of A+B+C while the producer surplus is equal to the combined areas of D+E+F. The value of the tax revenue is 0.In the second diagram below, the market does have a tax imposed upon it. Now, the consumer surplus is only equal to the area of A and the producer surplus is only equal to the area of F. Thetax revenue is equal to the combined areas of B+D and the deadweight loss is equal to the combined areas of C+E.V. Deadweight LossThe deadweight loss is directly dependent upon the size of the tax, as shown in the diagrams below. The greater the elasticity of a market, the smaller the amount of the deadweight loss. If the tax is doubled, then the deadweight loss increases by approximately four times the amount of the tax. Along with this the revenue begins to decreases. The greater the tax, the greater the deadweight loss, and the lower the revenue. In the example above, total revenue fell because the law of demand holds true. A market will experience less deadweight loss if it is more elastic. If the local government, state government, and federal government all impose taxes, the revenue for all governments will decrease becauseof the increase in taxes and deadweight
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