Chapter 8
of Taxation
WHAT’S NEW IN THE SEVENTH EDITION:
A new In the News box on “The Tax Debate” has been added.
LEARNING OBJECTIVES:白灼大明虾
By the end of this chapter, students should understand:
外星人来了how taxes reduce consumer and producer surplus.
the meaning and caus of the deadweight loss from a tax.
why some taxes have larger deadweight loss than others.
how tax revenue and deadweight loss vary with the size of a tax.
CONTEXT AND PURPOSE:
Chapter 8 is the cond chapter in a three-chapter quence dealing with welfare economics. In the previous ction on supply and demand, Chapter 6 introduced taxes and demonstrated how a tax affects the price and quantity sold in a market. Chapter 6 also described the factors that determine how the burden of the tax is divided between the buyers and llers in a market. Chapter 7 developed welfare economics—the study of how the allocation of resources affects economic well-being. Chapter 8 combines the lessons learned in Chapters 6 and 7 and address the effects of taxation on welfare. Chapter 9 will address the effects of trade restrictions on welfare.
The purpo of Chapter 8 is to apply the lessons learned about welfare economics in Chapter 7 to the issue of taxation that was addresd in Chapter 6. Students will learn that the cost of a tax to buyers and llers in a market exceeds the revenue collected by the government. Students will also learn about the factors that determine the degree by which the cost of a tax exceeds the revenue collected by the government.
KEY POINTS:
∙A tax on a good reduces the welfare of buyers and llers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raid by the government. The fall in total surplus—the sum of consumer surplus, producer surplus, and tax revenue—is called the deadweight loss of the tax.
∙Taxes have deadweight loss becau they cau buyers to consume less and llers to produce less, and the changes in behavior shrink the size of the market below the level that maximizes total surplus. Becau the elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger deadweight loss.
∙As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Becau a tax reduces the size of a market, however, tax revenue does not continually increa. It first ris with the size of a tax, but if the tax gets large enough, tax revenue starts to fall.
CHAPTER OUTLINE:
I. The Deadweight Loss of Taxation
A. Remember that it does not matter who a tax is levied on; buyers and llers will likely share in the burden of the tax.
B. If there is a tax on a product, the price that a buyer pays will be greater than the price the ller receives. Thus, there is a tax wedge between the two prices and the quantity sold will be smaller if there was no tax.
C. How a Tax Affects Market Participants
1. We can measure the effects of a tax on consumers by examining the change in consumer surplus. Similarly, we can measure the effects of the tax on producers by looking at the change in producer surplus.
闰年英语2. However, there is a third party that is affected by the tax—the government, which gets total tax revenue of T × Q. If the tax revenue is ud to provide goods and rvices to the public, then the benefit from the tax revenue must not be ignored.
If you spent enough time covering consumer and producer surplus in Chapter 7, students should have an easy time with this concept.
3. Welfare without a Tax
a. Consumer surplus is equal to: A + B + C.
b. Producer surplus is equal to: D + E + F.
c. Total surplus is equal to: A + B + C + D + E + F.
4. Welfare with a Tax
a. Consumer surplus is equal to: A.
b. Producer surplus is equal to: F.
c. Tax revenue is equal to: B + D.
白王后
d. Total surplus is equal to: A + B + D + F.
5. Changes in Welfare
一直走下去a. Consumer surplus changes by: –(B + C).
b. Producer surplus changes by: –(D + E).
c. Tax revenue changes by: +(B + D).
葡萄柚精油d. Total surplus changes by: –(C + E).
6. Definition of deadweight loss: the fall in total surplus that results from a market distortion, such as a tax.
D. Deadweight Loss and the Gains from Trade
1. Taxes cau deadweight loss becau they prevent buyers and llers from benefiting from trade.
纹身艺妓2. This occurs becau the quantity of output declines; trades that would be beneficial to both the buyer and ller will not take place becau of the tax.
Show the students that the nature of this deadweight loss stems from the reduction in the quantity of the output exchanged. Stress the idea that goods that are not produced, consumed, or taxed do not generate benefits for anyone.
