To fully understand how taxes affect economic well-being, we must
compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.
When a good is taxed,
both buyers and sellers of the good are made worse off
When a tax is imposed on a good
the equilibrium quantity of the good always decreases.
Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when
the supply of the product is more elastic than the demand for the product.
It does not matter whether a tax is levied on the buyers or the sellers of a good because
buyers and sellers will share the burden of the tax
The benefit that government receives from a tax is measured by
tax revenue
Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400. The deadweigh
$600.
Deadweight loss is the
decline in total surplus that results from a tax
A tax of $10 per unit is imposed on a certain good. The supply curve and the demand curve are straight lines. The tax reduces the equilibrium quantity in the market by 200 units. The deadweight loss from the tax is
$,1000.
Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have on
Market B
The Laffer curve relates
the tax rate to tax revenue raised by the tax.