ECO 2030 1nd Edition Lecture 15Outline of Last Lecture I. Deadweight lossesOutline of Current Lecture II. Review of Deadweight loss and ElasticityIII. The size of the take and deadweight lossesIV. The Laffer CurveCurrent LectureQuick Review:● When we loose C it is because welose certain consumers due to the tax● we loose E when costs of productionare too high due to the tax andsellers leave the market (deadweightlosses)● buyers loose B because they are stillin the market but have to pay ahigher price● sellers loose D because of reducedprofits because of the tax. ● However, Area D + B are reclaimedas tax revenue (Surplus)● Losses always exceed gains from taxElasticities○ more elastic supply → largerdeadweight losses○ More elastic demand curve →more deadweight lossesThese 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 lossThe 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 labortaxes)● To the right is the Laffer curve○ Economists cannot agree onwhere the peak is but theydo agree that at a certainamount of tax - revenue willdecrease● This graph shows how the deadweightloss increases much more than theincrease of the tax● Ronald Reagan - actually ran on theLaffer platform - promising people tocut taxes and saying it would increaserevenue (he was right)● He noticed that high taxes reduced peoples willingness to work and that lower taxes increased motivation to
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