ECN 001A Lecture 20: ECN 1A - Chap 8 & 13 (Lecture 20 - 22)
Lecture 20: 5/30/18
Chapter 8: The Costs of Taxation
• Tax
o Drives wedge between price buyers pay and price sellers receive
o Raises price buyers pay and lowers price sellers receive
o Reduced quantity bought and sold
o Effects are sae whether tax is imposed on buyers or sellers
• Effects of a Tax
o Deadweight Loss of a tax:
▪ Fall in total surplus that results from a market distortion, such as tax
• What Determines Size of the DWL?
o Which goods/services should gov tax to raise the revenue it needs?
▪ Those with the smallest DWL (Deadweight Loss)
• DWL and the Elasticity of Supply
o Inelastic Supply::
▪ Harder for firms to leave the market when tax reduces Ps
▪ So tax only reduces Q a little, and DWL is small
o Elastic Supply:
▪ Easier for firms to leave market when tax reduces Ps
▪ Greater Q falls below surplus-maximizing quantity = greater DWL
• DWL and the Elasticity of Demand
o Inelastic Demand:
▪ Harder for consumers to leave market when the tax raises Pb
▪ So tax only reduced Q a little, and DWL is small
o Elastic Demand:
▪ Easier for buyers to leave market when tax increase Pb
▪ The more Q falls below the surplus-maximizing quantity = DWL greater
• How Big Should the Government Be?
o Bigger gov provides more services, but requires higher taxes, causing DWLs
▪ Larger DWL from taxation = greater argument for smaller gov
o Tax on labor income is the biggest source of gov revenue ( about 40%)
• DWL and Size of Tax
o When tax increase, DWL rises even more
• Revenue and Size of Tax
o When tax is small, increasing it causes revenue to rise
o Tax is larger, increasing it causes tac revenue to fall
o Laffer Curve: shows relationship between size of tax and tax revenue
Lecture 21: 6/1/18
Chapter 13: Costs of Production
• Total Revenue, Total Cost, Profit
o Profit = Total Revenue - Total Cost
▪ Total Revenue: amount a firm receives from the sale of its output
▪ Total Cost: market value of the inputs a firm uses in production
• Costs: Explicit vs. Implicit
o Explicit Costs: require an outlay of money
▪ Ex: paying wages to workers
o Implicit Costs: do not require a cash outlay
▪ Ex: opportunity cost of the owner’s time
• Economic Profit vs. Accounting Profit
o Accounting Profit: total revenue minus total explicit costs
▪ Ignores implicit costs, so is higher than economic profit
o Economic Profit: total revenue minus total costs
▪ Including explicit and implicit costs
• Production Function
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ECN 001A Full Course Notes
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, solve for deadweight loss as a function of T. 
