ECON 101 Chapter Notes - Chapter 4: Deadweight Loss, Tax Incidence, Economic Surplus
4.3
Results of Govt. Price Controls:
● Some people win: winners from rent control are the ppl who are paying less for rent because
they live in rent-controlled apartments
○ landlords may also gain if they break the law by charging rents above the legal
maximum for controlled apartments (if those illegal rents are higher than the
competitive equilibrium rents would be)
● Some people lose: losers from rent control are the landlords of rent-controlled apartments who
abide by the law and renters who are unable to find apartments to rent at the controlled price
● There is a loss of economic efficiency: rent control reduces economic efficiency because fewer
apartments are rented than would be rented in competitive market
○ resulting deadweight loss measures decrease in economic efficiency
Positive and Normative Analysis of Price Ceilings and Price Floors:
● Positive analysis - what is
○ ex) evaluation of price ceilings and rent
● Normative analysis - what should be
4.4
Economic Effect of Taxes
● analyzing taxes is an important part of the field of economics known as public finance
The effect of taxes on economic efficiency:
● Whenever a govt. taxes a good or service —> less of that good or service will be produced and
consumed
● Increase in cost causes supply curve to shift up because sellers will now require a price that is
grater to supply the same quanity
● Tax on cigarettes ($1 increase) has reduced both consumer surplus and producer surplus
○ some of the reduction becomes tax revenue for the govt.
○ the rest of the reduction in consumer and producer surplus is equal to the deadweight
loss from the tax
● dead weight loss from a tax is referred to as the excess burden of the tax
○ a tax is efficient if it imposes a small excess burden relative to the tax revenue it raises
Tax Incidience: who actually pays a tax?
● Tax incidence: the actual division of the burden of a tax between buyers and sellers in a market
○ ex) federal govt. levies an excess tax of 18.4 sets/gasoline sold
■ gas wonders collect this tax and forward to the govt. but who actually bears the
burden of the tax?
Does it make a difference whether the government collects a tax from buyers or sellers?
● The incidence of a tax does not depend on whether the government collects a tax from the
buyers of a good or from the sellers.
● supply does not change but demand does (ex pay 10 cents less than what they wanted)
Is the burden of the social security tax really shared equally between workers and firms
● most of the time employers take tax out of paycheck
● FICA - funds social security and medicare programs - largest tax ppl w/ low income pay
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ECON 101 Full Course Notes
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Document Summary
Some people lose: losers from rent control are the landlords of rent-controlled apartments who abide by the law and renters who are unable to find apartments to rent at the controlled price. There is a loss of economic efficiency: rent control reduces economic efficiency because fewer apartments are rented than would be rented in competitive market resulting deadweight loss measures decrease in economic efficiency. Positive and normative analysis of price ceilings and price floors: Ex) evaluation of price ceilings and rent. Analyzing taxes is an important part of the field of economics known as public finance. Whenever a govt. taxes a good or service > less of that good or service will be produced and consumed. Increase in cost causes supply curve to shift up because sellers will now require a price that is grater to supply the same quanity. Dead weight loss from a tax is referred to as the excess burden of the tax.