ECO2030 1nd Edition Lecture 19 Outline of Last Lecture I Surplus Outline of Current Lecture II Tax and welfare III Deadweight loss due to a tax IV Elasticity and deadweight loss Current Lecture The effects of a tax tax reduces well being less CS and PS a tax on a good places a wedge between what buyers pay and sellers receive tax revenue we need to count tax revenue as a positive contribution to wellbeing Not all CS and PS is lost because the government receives some however when there is a tax you have to loose some overall surplus The tax revenue the government gets the size of the tax x the quantity sold tax revenue T x Q How tax affects welfare anytime a government puts a tax on a good there is lost welfare called the deadweight loss Deadweight loss fall in total surplus because of a tax CS w o tax A B C Total Surplus w o tax A B C D E F 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 PS w o tax D E F CS w tax A Total Surplus w tax A B D F PS w tax F Area C and E represent the deadweight loss because of the tax Area B and D is revenue for the government deadweight losses and gains from trade taxes cause deadweight losses as seen above by the loss of C and E this prevents some buyers and sellers from getting all gains from trade the gains from trade the difference between buyers value and sellers costs once the tax is imposed trades are not made deadweight losses Price elasticities of supply and demand more elastic supply larger deadweight losses More elastic demand curve more deadweight losses
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