Lecture 9 - Revenue issues Flashcards Preview

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Excess burden of taxation - definition

This is the distortionary cost of raising a tax, compared with a poll tax yielding the same revenue -> deadweight loss


How does the DWL change with tax rate and elasticity of demand?

1) DWL is multiplied by 4 when the tax rate is doubled (see diagram
2) DWL increases with the elasticity of demand (larger reduction in quantity demanded, think of why petrol is often taxed, because demand is quite inelastic)


Most efficient combination of taxes should

equal the marginal excess burden (MEB) of each tax, considering that it is usually increasing.


Formal vs effective tax incidence + example

Formal is who is legally liable to pay it, while effective is who ultimately bears the burden of tax.
-> diagram shows that in a perfectly competitive market, the burden of a sales tax is partly on the buyer and partly on the seller. The more inelastic side of the market bears more of it.