9) CH8 The costs of taxation Flashcards
Does it matters whether the tax is levied on buyers or sellers?
NO, the price paid by buyers will be higher and the amount received by sellers will be lower.
What are the effects of a tax?
- It places a wedge between the price buyers pay and the price sellers receive.
- The quantity sold falls below the level that would be sold without a tax.
- The size of this market shrinks.
What is the tax revenue?
Size of a tax per unit * quantity sold
What is a deadweight loss?
Fall in total surplus that results from a market distorsion, such as taxes.
It can cause the destruction of mutually advantageous trades.
C+E here
What is the impacte on total welfare of a tax?
- Change in consumer surplus
- Change in producer surplus
- Change in tax revenue
- The losses of buyers and sellers exceed the revenue raised by the government
What determines wether the deadweight loss from a tax is large or small?
It depends on the price elasticity of supply and demand.
When elasticity is small, the deadweight loss is small
When elasticity is huge, deadweight loss is huge.
What is the impact of an increase in the tax rate?
The deadweight loss grows even more rapidly than the size of the tax.
Moreover, the revenue starts to decrease, after a certain point.
What is the idea of Laffer concerning taxes?
If you cut it, more people will be willing to work, so the tax revenue will rise.
