Chapter(8:(The(Costs(of(Taxation(Deadweight(Loss(of(Taxation:((7 T(is(the(size(of(the(tax(and(Q(is(the(quantity(of(goods(sold;(T(x(Q(is(the(revenue(of(the(gov’t((7 tax(revenue(=(T((tax)(x(Q((quantity(sold)(How(a(Tax(Affects(Welfare(:(((((((7 without(a(tax:((o equilibrium(price(and(quantity(are(found(at(the(intersection(of(the(supply(and(demands(curves(o consumer(surplus(is(between(price(and(demand;(A+B+C(o producer(surplus(is(between(supply(curve(and(price;(D+E+F(o tax(revenue(=(0(7 with(a(tax:((o price(paid(by(buyers(rises(to(P2;(consumer(surplus(is(area(A(o price(received(by(sellers(falls(to(P3;(producer(surplus(is(area(F(o quantity(sold(falls(to(Q2;(tax(revenue(is(area(B+D(7 Changes(in(Welfare:(o Consumer(surplus(falls(by(B+C((negative(area)(o Producer(surplus(falls(by(D+E((negative(area)(o Tax(revenue(rises(by(B+D((positive(area)(o When(all(values(are(added(together,(the(total(surplus(falls(by((C+E((losses%to%buyers%and%sellers%from%a%tax%exceed%the%revenue%raised%by%the%gov’t)(o Deadweight*loss7(fall(in(total(surplus(that(results(from(a(market(distortion((ex.(Tax)(Deadweight(Losses(and(the(Gains(from(trade:(7 taxes(cause(deadweight(losses(because(they(prevent(buyers(and(sellers(from(realizing(some(of(the(gains(from(trade(7 fall(in(surplus((C+E)(measures(the(losses(((((7 when(tax(raises(the(price(to(buyers(to(P2(and(lowers(the(price(to(sellers(to(P3,(marginal(buyers(and(sellers(leave(he(market,(so(Q1(falls(to(Q2(7 the(gains(from(trade((difference(between(buyers’(value(and(sellers’(cost)(are(less(than(the(tax(7 as(a(result,(these(trades(are(not(made(once(the(tax(is(imposed;(deadweight(loss(is(the(surplus(lost(because(the(tax(discourages(these(mutually(advantageous(trades(Determinants(of(the(Deadweight(Loss:(((a) supply(curve(is(inelastic:(quantity(supplied(responds(only(slightly(to(changes(in(price((b) supply(curve(is(elastic:(quantity(suppl ied( responds(substantially(to(changes(in(price( deadweight(loss((area(of(triangle)(is(larger(when(supply(curve(is(more(elastic((c) demand(curve(is(inelastic,(deadweight(loss(is(small((d) demand(curve(is(more(elastic,(deadweight(loss(is(larger(7 the%greater%the%elasticities%of%supply%and%demand,%the%greater%the%deadweight%loss%of%a%tax%Deadweight(Loss(and(Tax(Revenue(as(tax es( Vary:(((a) small(tax:(deadweight(area(is(small((b) &((c)(as(tax(rises,(deadweight(grows(larger(7 deadweight(loss(of(a(tax(rises(even(more(than(the(size(of(the(tax(7 as(the(tax(grows,(tax(revenue(grows(until(it(climaxes(then(falls((c) as(the(tax(increases,(its(deadweight(loss(gets(larger((d)
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