Econ 201 1st Edition Lecture 24Outline of Last Lecture 1. Welfare Analysis of a Simple TaxOutline of Current Lecture 1. Beer Taxation ExamplesCurrent LectureBeer Tax ~ Effects on Surplus ValuesCS* = (1/2) x (20 – 10) x 10,000 = 50,000PS * = (1/2) x (10 – 5) x 10,000 = 25,000TS* = CS* + PS* = 75,000CST = (1/2) x (20 – 14) x 6,000 = 18,000PST = (1/2) x (8 – 5) x 6,000 = 9,000TxR = 6 x 6,000 = 36,000TST= CST + TxR+ PST = 63,000DwL = 75,000 – 63,000 = 12,000Or: DwL = (1/2) x 6 x (10 – 6) = 12,000Tax Size and Tax Revenue ~ the LafferCurvePB = 12.7; PS = 8.7; QT = 7.333TxR = 4 x 7,333 = 29,333 ($/mo.)PB = 14; PS = 8; QT = 6TxR = 6 x 6,000 = 36,000 These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.PB = 16.7; PS = 6.7; QT = 3.3TxR = 10 x 3,333 = 33,333 Tax Size and Deadweight LossDwL = (1/2) x 4 x (10,000 – 7,333) = 5,334 ($/mo.)DwL = (1/2) x 6 x (10,000 – 6,000) = 12,000DwL = (1/2) x 10 x (10,000 – 3,333) = 33,335 ($/mo.)As tax rate is increased, Deadweight Loss increases at an increasing rate, until market is destroyed. (T> 15)Price Elasticities and Deadweight LossDeadweight Loss for a given tax rate is larger when S and D are more elastic.Greater sensitivity to price changes implies larger Quantity reduction. DwL1= (1/2) xTx (Q* – QT1) DwL2= (1/2) xTx (Q* – QT2)
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