ECON 1 Lecture Notes - Lecture 10: Laffer Curve, Market Power, Comparative Advantage
5/8/18
Chapter 8: The Cost of Taxation
- A tax:
o Reduces the quantity bought and sold
o Raises the price buyers pay and lowers the price sellers receive
o Drives a wedge between the price buyers pay and the price sellers receive
- Effects of a tax are the same whether the tax is imposed on buyers or sellers
- We can determine consumer surplus, producer surplus, tax revenue, and total surplus with and
without tax
- Deadweight loss of tax is the fall in the total surplus that results from a market distortion (tax)
- With a tax, the value of the units to buyers is greater than the cost of producing them
o The tax prevents some mutually beneficial trades
- Consumer surplus is the area of the triangle above the
horizontal line at equilibrium
o ½ x $200 x 100 = $10,000
- Producer surplus is the area of the triangle below the
horizontal line at equilibrium
o ½ x $200 x 100 = $10,000
- Total surplus – CS + PS = $20,000
- However, if you impose a tax where that makes the
quantity 75, the price to buy is $250 and the price to supply
is $150
- The consumer surplus NOW is the pink triangle above the
horizon at the line for the price to buy ($250)
o ½ x $150 x 75 = $5626
- The producer surplus now is the green triangle below the
horizon at the price to supply ($150)
o ½ x $150 x 150 = $5625
- The tax revenue is the red box in-between the consumer
and producer surplus
o $100 x 75 = $7400
- Total surplus = $18, 750
- DWL = $1250
o The blue triangle
How big should the government be?
- A bigger government provides more services but required higher taxes, which causes DWLs
(deadweight losses)
find more resources at oneclass.com
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Document Summary
A tax: reduces the quantity bought and sold, raises the price buyers pay and lowers the price sellers receive, drives a wedge between the price buyers pay and the price sellers receive. Effects of a tax are the same whether the tax is imposed on buyers or sellers. We can determine consumer surplus, producer surplus, tax revenue, and total surplus with and without tax. Deadweight loss of tax is the fall in the total surplus that results from a market distortion (tax) With a tax, the value of the units to buyers is greater than the cost of producing them: the tax prevents some mutually beneficial trades. Consumer surplus is the area of the triangle above the horizontal line at equilibrium: x x 100 = ,000. Producer surplus is the area of the triangle below the horizontal line at equilibrium: x x 100 = ,000. Total surplus cs + ps = ,000.
