ECON 201 Chapter Notes - Chapter 13: Tax Wedge, Deadweight Loss, Economic Surplus
ECON 201
Chapter 5
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Welfare and economics
externalities
Equity and efficiency
Are markets a good way to allocate scarce resources in view of the fact that they not only give
rise to inequality and poverty, but also fail to capture the impacts of productive activity on non-
market participants?
Welfare economics: assesses how well the economy allocates its scarce resources in
accordance with the goals of efficiency and equity.
Equity: deals with how society's goods and rewards are, and should be, distributed among its
different members, and how the associated costs should be apportioned.
Efficiency: addresses the question of how well the economy's resources are used and allocated.
Consumer and producer surplus
Consumer surplus: is the excess of consumer willingness to pay over the market price.
Supplier or producer surplus: is the excess of market price over the reservation price of the
supplier.
Consumer Surplus = (demand value - price) = area
ABE
Producer Surplus = (price - reservation supply
value) = area BEC
Efficient market outcomes
An efficient market maximizes the sum of producer and consumer surpluses.
Taxation, surplus and efficiency
A tax wedge is the difference between the consumer and producer prices.
The revenue burden is the amount of tax revenue raised by a tax.
The excess burden, or deadweight loss, of a tax is the component of consumer and producer
surpluses forming a net loss to the whole economy.
A distortion in resource allocation means that production is not at an efficient output.
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ECON 201 Full Course Notes
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Document Summary
Welfare economics: assesses how well the economy allocates its scarce resources in accordance with the goals of ef ciency and equity. Equity: deals with how society"s goods and rewards are, and should be, distributed among its different members, and how the associated costs should be apportioned. Ef ciency: addresses the question of how well the economy"s resources are used and allocated. Consumer surplus: is the excess of consumer willingness to pay over the market price. Supplier or producer surplus: is the excess of market price over the reservation price of the supplier. Consumer surplus = (demand value - price) = area. Producer surplus = (price - reservation supply value) = area bec. An ef cient market maximizes the sum of producer and consumer surpluses. A tax wedge is the difference between the consumer and producer prices. The revenue burden is the amount of tax revenue raised by a tax.
