Chapter 8 - Application: the Costs of Taxation Flashcards
What happens when a tax is levied on buyers? What happens when a tax is levied on sellers?
(buyers) The demand curve shifts downward by the size of the tax. (sellers) The supply curve will shift upward by that amount.
What Determines whether the deadweight loss from a tax is large or small?
The answer is the price elasticities of supply and demand, which measures how much the quantity supplied and quantity demanded responds to change in the price.
What is Marginal cost of public funds?
The total cost to society of raising one more dollar in tax revenue.
How big should the government be?
The larger the deadweight loss of taxation, the larger the cost of any government program.
If taxation entails large deadweight losses, then these losses are an argument for a leaner government that does less and taxes less.
But if taxes impose small deadweight losses, then government programs are less costly than they otherwise might be.
What is Marginal benefit of public funds?
The value that society places on one more dollar of expenditure on a government program.
The government should continue to increase expenditures on the programs, and increase the taxes to finance it, up to the point where MCF = MBF. (Marginal Cost funds = Marginal benefits funds)
Please refer to chapter 8 slides for understanding deadweight on graphs.
Thankyou :)
