Chapter 8(costs of taxation) Flashcards
how is the benefit of buyers in a market measured?
consumer surplus
how is the benefit of sellers in a market measured?
producer surplus
How is the benefit of the government in a market measured?
Total tax revenue
total tax revenue
- (size of tax)*(quantity sold)
- area between consumer surplus and producer surplus on supply demand curve
what is the total surplus with a tax?
CS+PS+tax revenue
deadweight loss
- the fall in total surplus that results from a tax
- represents the number of buyers and sellers that drop out due to the tax
where is deadweight loss on the supply demand curve?
- it is the area of total surplus that is lost
- triangle to the right of new total surplus
the more ___demand and supply are, the greater the deadweight loss
elastic
How does a bigger tax effect deadweight loss
-the bigger the tax, the bigger deadweight loss is
what happens when a VERY large tax is implemented
-very large taxes will generate no more tax revenue than a smaller tax because the number of deadweight losses is so high
How is tax revenue effected as a tax goes up
- at first the tax revenue goes up
- then after a certain point, it plummets because the deadweight loss is so high, that less revenue is being generated
