Principles of Microeconomics Chapter 8 Taxes place a wedge in between the price buyers pay and the price Because of this q sold falls below the level that would be sold w o sellers receive tax How a Tax Affects Market Participants CS and PS for buyers and sellers Gov t T size of tax in terms of price x Q revenue The losses to buyers and sellers from a tax exceed the revenue Deadweight loss the fall in total surplus that results from a market raised by the government distortion such as a tax this amount does not end up as revenue or surplus to anyone Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains of trade Determinants of DWL deadweight loss the deadweight loss Elasticity of Supply The more elastic the supply curve the larger the Elasticity of Demand The more elastic the demand curve the larger this is due to the fact that taxes induce buyers and sellers to change their behaviors so if the supply and demand are inelastic buyers and sellers are not going to change their behaviors too drastically Less DWL DWL and Tax Revenue as Taxes Vary Taxes rarely stay the same for long periods of time As the size of a tax grows so does its DWL The revenue first increases and then decreases as tax grows larger bell curve
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