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8 Application: The Costs of Taxation
Application: The Costs of Taxation ,[object Object],[object Object],[object Object]
THE DEADWEIGHT LOSS OF TAXATION ,[object Object]
THE DEADWEIGHT LOSS OF TAXATION ,[object Object]
Figure 1 The Effects of a Tax Copyright © 2004  South-Western Quantity 0 Price Size of tax Price buyers pay Price sellers receive Demand Supply Price without tax Quantity without tax Quantity with tax
How a Tax Affects Market Participants ,[object Object],[object Object],[object Object]
How a Tax Affects Market Participants  ,[object Object],[object Object],[object Object],[object Object]
Figure 2 Tax Revenue Copyright © 2004  South-Western Quantity 0 Price Tax revenue ( T  × Q) Size of tax ( T ) Quantity sold ( Q ) Demand Supply Quantity without tax Quantity with tax Price buyers pay Price sellers receive
Figure 3 How a Tax Effects Welfare Copyright © 2004  South-Western Quantity 0 Price A F B D C E Demand Supply = P B Q 2 = P S Price buyers pay Price sellers receive = P 1 Q 1 Price without tax
How a Tax Affects Market Participants ,[object Object],[object Object]
How a Tax Affects Welfare
How a Tax Affects Market Participants ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Deadweight Losses and the Gains from Trade ,[object Object]
Figure 4 The Deadweight Loss Copyright © 2004  South-Western Quantity 0 Price Cost to sellers Value to buyers Size of tax Demand Supply Lost gains from trade Reduction in quantity due to the tax Price without tax Q 1 P B Q 2 P S
DETERMINANTS OF THE DEADWEIGHT LOSS ,[object Object],[object Object],[object Object]
Figure 5 Tax Distortions and Elasticities Copyright © 2004  South-Western (a) Inelastic Supply Price 0 Quantity Demand Supply Size of tax When supply is relatively inelastic, the deadweight loss of a tax is small.
Figure 5 Tax Distortions and Elasticities Copyright © 2004  South-Western (b) Elastic Supply Price 0 Quantity Demand Supply Size of tax When supply is relatively elastic, the deadweight loss of a tax is large.
Figure 5 Tax Distortions and Elasticities Copyright © 2004  South-Western (c) Inelastic Demand Price 0 Quantity Demand Supply Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small.
Figure 5 Tax Distortions and Elasticities Copyright © 2004  South-Western (d) Elastic Demand Price 0 Quantity Size of tax Demand Supply When demand is relatively elastic, the deadweight loss of a tax is large.
DETERMINANTS OF THE DEADWEIGHT LOSS ,[object Object],[object Object],[object Object]
DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY ,[object Object]
Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes Copyright © 2004  South-Western Quantity 0 Price (a) Small Tax Tax revenue Demand Supply Q 1 Deadweight loss P B Q 2 P S
Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes Copyright © 2004  South-Western Quantity 0 Price (b) Medium Tax Tax revenue P B Q 2 P S Supply Demand Q 1 Deadweight loss
Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes Copyright © 2004  South-Western Quantity 0 Price (c) Large Tax Tax revenue Demand Supply Q 1 P B Q 2 P S Deadweight loss
DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY ,[object Object],[object Object],[object Object]
Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax Copyright © 2004  South-Western (a) Deadweight Loss Deadweight Loss 0 Tax Size
Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax Copyright © 2004  South-Western (b) Revenue (the Laffer curve) Tax Revenue 0 Tax Size
DEADWEIGHT LOSS AND TAX REVENUE AS TAXES VARY ,[object Object],[object Object]
CASE STUDY:  The Laffer Curve and Supply-side Economics ,[object Object],[object Object]
Summary ,[object Object],[object Object]
Summary ,[object Object],[object Object]
Summary ,[object Object],[object Object],[object Object]

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8

  • 1. 8 Application: The Costs of Taxation
  • 2.
  • 3.
  • 4.
  • 5. Figure 1 The Effects of a Tax Copyright © 2004 South-Western Quantity 0 Price Size of tax Price buyers pay Price sellers receive Demand Supply Price without tax Quantity without tax Quantity with tax
  • 6.
  • 7.
  • 8. Figure 2 Tax Revenue Copyright © 2004 South-Western Quantity 0 Price Tax revenue ( T × Q) Size of tax ( T ) Quantity sold ( Q ) Demand Supply Quantity without tax Quantity with tax Price buyers pay Price sellers receive
  • 9. Figure 3 How a Tax Effects Welfare Copyright © 2004 South-Western Quantity 0 Price A F B D C E Demand Supply = P B Q 2 = P S Price buyers pay Price sellers receive = P 1 Q 1 Price without tax
  • 10.
  • 11. How a Tax Affects Welfare
  • 12.
  • 13.
  • 14. Figure 4 The Deadweight Loss Copyright © 2004 South-Western Quantity 0 Price Cost to sellers Value to buyers Size of tax Demand Supply Lost gains from trade Reduction in quantity due to the tax Price without tax Q 1 P B Q 2 P S
  • 15.
  • 16. Figure 5 Tax Distortions and Elasticities Copyright © 2004 South-Western (a) Inelastic Supply Price 0 Quantity Demand Supply Size of tax When supply is relatively inelastic, the deadweight loss of a tax is small.
  • 17. Figure 5 Tax Distortions and Elasticities Copyright © 2004 South-Western (b) Elastic Supply Price 0 Quantity Demand Supply Size of tax When supply is relatively elastic, the deadweight loss of a tax is large.
  • 18. Figure 5 Tax Distortions and Elasticities Copyright © 2004 South-Western (c) Inelastic Demand Price 0 Quantity Demand Supply Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small.
  • 19. Figure 5 Tax Distortions and Elasticities Copyright © 2004 South-Western (d) Elastic Demand Price 0 Quantity Size of tax Demand Supply When demand is relatively elastic, the deadweight loss of a tax is large.
  • 20.
  • 21.
  • 22.
  • 23. Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes Copyright © 2004 South-Western Quantity 0 Price (a) Small Tax Tax revenue Demand Supply Q 1 Deadweight loss P B Q 2 P S
  • 24. Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes Copyright © 2004 South-Western Quantity 0 Price (b) Medium Tax Tax revenue P B Q 2 P S Supply Demand Q 1 Deadweight loss
  • 25. Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes Copyright © 2004 South-Western Quantity 0 Price (c) Large Tax Tax revenue Demand Supply Q 1 P B Q 2 P S Deadweight loss
  • 26.
  • 27. Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax Copyright © 2004 South-Western (a) Deadweight Loss Deadweight Loss 0 Tax Size
  • 28. Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax Copyright © 2004 South-Western (b) Revenue (the Laffer curve) Tax Revenue 0 Tax Size
  • 29.
  • 30.
  • 31.
  • 32.
  • 33.