ECO2030 1nd Edition Lecture 19Outline of Last Lecture I. SurplusOutline of Current Lecture II. Tax and welfareIII. Deadweight loss due to a taxIV. Elasticity and deadweight lossCurrent Lecture● The effects of a tax - tax reduces well being, less CS and PS- a tax on a good places a wedge betweenwhat buyers pay and sellers receive● tax revenue - we need to count tax revenueas a positive contribution to wellbeing○ Not all CS and PS is lost becausethe government receives some○ however, when there is a tax, youhave to loose some overall surplus● The tax revenue the government gets = (the size of the tax)x(the quantity sold) ○ tax revenue = T x QHow tax affects welfare ● anytime a government puts a tax on agood there is lost welfare (called thedeadweight loss)○ Deadweight loss - fall in totalsurplus because of a tax● CS w/o tax = A + B + C● Total Surplus w/o tax = A + B + C + D +E + FThese 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
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