EC120 Lecture 5: EC120- Chapter 8 Costs of Taxation
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EC120 Full Course Notes
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Chapter 8: application the costs of taxation. The quantity sold falls below the level that would be sold without a tax. A tax on a good causes the size of the market for the good to shrink: how a tax affects market participants, benefit of buyers is measured by consumer surplus. The amount they are willing to pay the amount they actually paid: benefit of sellers is measured by producer surplus. The amount they sold the good for the cost of production: the government gets tax revenue. Incentive for buyers to consumer less and sellers to produce less. Inefficient quantity of output: deadweight losses and the gains from trade, taxes cause deadweight loss because they prevent buyers and sellers from realizing some of the gains from trade.
