ECO 2030 1nd Edition Lecture 15 Outline of Last Lecture I Deadweight losses Outline of Current Lecture II Review of Deadweight loss and Elasticity III The size of the take and deadweight losses IV The Laffer Curve Current Lecture Quick Review When we loose C it is because we lose certain consumers due to the tax we loose E when costs of production are too high due to the tax and sellers leave the market deadweight losses buyers loose B because they are still in the market but have to pay a higher price sellers loose D because of reduced profits because of the tax However Area D B are reclaimed as tax revenue Surplus Losses always exceed gains from tax Elasticities more elastic supply larger deadweight losses More elastic demand curve more deadweight losses 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 Note who pays the tax this is a review but you simply draw the demand and supply curve and then you can see who pays the majority of the tax In this case buyers pay most of the tax because demand is inelastic How big should government be The larger the deadweight loss the larger the cost of any government programs If taxes impose larger deadweight losses there is a strong argument for smaller government If taxes impose small deadweight losses government programs are less costly The deadweight loss increases as the tax increases The deadweight loss increase is greater than the increase of the tax Tax revenue increases initially but then decreases Higher taxes reduce the size of the market The following 3 graphs show how a bigger tax increases the size of the deadweight loss The Laffer curve Called Supply side economics Was discovered by Arthur Laffer he figured out that if taxes were too high you could actually increase tax revenue by cutting taxes this is because such high taxes reduce participation in the market especially labor taxes To the right is the Laffer curve Economists cannot agree on where the peak is but they do agree that at a certain amount of tax revenue will decrease This graph shows how the deadweight loss increases much more than the increase of the tax Ronald Reagan actually ran on the Laffer platform promising people to cut taxes and saying it would increase revenue he was right He noticed that high taxes reduced peoples willingness to work and that lower taxes increased motivation to work
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