ECON 102 Lecture Notes - Lecture 5: Arthur Laffer, Laffer Curve, Deadweight Loss
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Although both buyer and seller share the burden of the tax, its not necessarily an equal burden. Governments needs money to do things people want. When governments tax, it costs consumers and producers more than just the amount of tax. It costs money to run the irs- administrative costs. If the goal in tax policy is ef ciency- minimizing deadweight loss, then policymakers should choose the goods with the lowest price elasticities. Price elasticity of demand- the percentage change in quantity demanded divided by percentage change in price. Since we know that price and quantity demanded will always move in opposite directions, we drop the minus sign (for price elasticity of demand only!) Price elasticity of demand is always negative without absolute value. Economists are interested in price elasticity of demand, as it is crucial to understanding and predicting market outcomes. Law of demand- a positive change in price will lead to a negative change in quantity demanded.
