ECON 2304 Chapter Notes - Chapter 8: Deadweight Loss, Market Distortion, Demand Curve
2 Oct 2016
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Chapter 8 textbook notes: the costs of taxation. Tax affects the size of the market. But tax is necessary for civilize societies. Analyze how the cost of taxes to buyers and sellers exceeds the revenue raised by the government. Tax on a good causes the size of the market for the good to shrink. Tax revenue = t x q: t = size of tax, q = quantity of the good sold, the area of the wedge between supply and demand curve is the tax revenue. Total surplus = cs + ps + tax revenue. Deadweight loss the fall in total surplus that results from a market distortion such as a tax: deadweight loss = total surplus (before tax) total surplus (after tax) Tax causes deadweight losses because: they prevent buyers and sellers from realizing. Deadweight loss is larger when the demand/supply curve is more elastic. Deadweight loss and tax revenue as taxes vary.
