Topic 8- The costs of taxation Flashcards
Why do we need Taxes?
-social services/defense/education
are not well provided for by the amrket
-wealth redistribution (Equity)
Recall! When a tax is levied on buyers
The demand curve shifts down by the total amount of the tax
Recall! When a tax is levied on sellers
The supply curve shifts upwards by the total amount of the tax!
Recall what happens when taxes are created
Buyers pay more and sellers recieve less! QUANTITY SOLD DECREASES AND PRICES INCREASE~``
How to calculate Tax revenue from the supply and demand charts
Tax revenue is going to be the rectangle the size of the tax wedge!! look at the wedge and get the area <3
Tax Revenue
-what is it
-who gets the benefits from it
This is the money that goes to the govt for social services and all
the benfit does not go to govt but to whom the revenue is spent on!
What do taxes do to a market
THEY SHRINK IT! CREATE DW LOSS
Tax base difintion
What the tax is applied to
Deadweight loss
This is the fall in TOTAL SURPLUS that is a result of tax/other policy
Why do taxes make markets inefficient
Because they distort incentives, people buy less and produce less
Hoq to do qustions where you are given a scenario pre tax, and then a scenario post tax, and asked to calculat dw loss
WHERE IS DW LOSS LOCATED ON SUPPLY AND DEMAND CURVES
- see the consumer surplu sand prod surplus BEFORE tax
- See it after tax, does the trade still happen
- compare the surplus after and before!
This is the triangle in between supply and demand curuves after rectangular taaxwedge <3
what sort of curve elasticity results in higher moroe deadweight loss, why?
THE MORE ELASTIC THE MORE DW!!!! BECAUSE taxes are all about inspiring consumers to buy less and producers to mak less, soooooo when curve is elastic (people can opt out) OFC PEOPLE MORE EASILY DROP THAT GOOD AND BUY LESS
MORE ELASTIC=MORE DEADWEIGHT
Why do taxes have a deadweight loss?
Because they comple buyers to buy less and producers to make less
What happens to dead weight loss as taxes go up?
INCREASED! obviosuly because if humongous tax a SHIT LOAD of buyer wont buy and sellers wont produce
What happens to tax revenue as taxes go up?
LAFFER CURVE! Tax revenue first inceases then decreases!!
