EC120 Chapter Notes - Chapter 8: Market Distortion, Economic Equilibrium, Black Market
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EC120 Full Course Notes
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Tax revenue is included in total surplus, because tax revenue can be used to provide services such as roads, education, etc. Without a tax with a tax: cs = a + b + c cs = a, ps = d + e + f ps = f, deadweight loss: ts falls by c + e. Ts = a + b + c + d + e + f a + b + d + f. Tax revenue after tax = b + d. Deadweight loss: results from a market distortion, such as a tax fall in ts. Losses to buyers/sellers exceed the revenue raised by government: value of the units c + e to buyers is greater than the cost of producing them, so the tax has prevented some mutually beneficial trades. The goods/services with the smallest deadweight loss are taxed depends on elasticity of s & d.
