1 / 7

Chapter 8 Application: The Costs of Taxation

Chapter 8 Application: The Costs of Taxation. Review of Taxes. Taxes raise revenue for gov’t & it comes out of someone’s pocket Both buyers & sellers are worse off when a good is taxed Need to compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.

taniel
Download Presentation

Chapter 8 Application: The Costs of Taxation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 8Application: The Costs of Taxation

  2. Review of Taxes • Taxes raise revenue for gov’t & it comes out of someone’s pocket • Both buyers & sellers are worse off when a good is taxed • Need to compare the reduced welfare of buyers and sellers to the amount of revenue the government raises

  3. Deadweight Loss of Taxation • Welfare without a Tax • Entire area in red & blue is total surplus • Welfare is maximized

  4. Changes in Welfare with a Tax • The losses to buyers and sellers from a tax exceed the revenue raised by the government • This fall in total surplus is called Deadweight Loss • Taxes distort incentives & cause markets to allocate resources inefficiently

  5. Deadweight Loss • Taxes cause DWL because they prevent buyers & sellers from realizing some of the gains from trade

  6. Determinants of Deadweight Loss • Greater elasticities yield greater DWL

  7. DWL and Tax Revenue as Taxes Vary • As tax gets larger, DWL quickly increases • As tax gets larger, tax revenue first rises then starts to fall eventually • Extreme case shown in Laffer Curve

More Related