© 2007 Thomson South-Western
© 2007 Thomson South-Western
How do you think
about the Tax?
Good to the economy
or not?
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Application: The Costs of Taxation
• Welfare economics is the study of how the
allocation of resources affects economic well-
being.
– The equilibrium in a market maximizes the total
welfare of buyers and sellers.
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8-1 THE DEADWEIGHT LOSS(无谓
损失) OF TAXATION
• How do taxes affect
the economic well-
being of market
participants?
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8-1 THE DEADWEIGHT LOSS OF
TAXATION
• It does not matter whether
a tax on a good is levied
on buyers or sellers
of the good . . . the price
paid by buyers rises, and
the price received by
sellers falls.
© 2007 Thomson South-Western
Figure 1 The Effects of a Tax
Price
The price paid by consumers is higher
The price received by firms is lower.
Supply
Price buyers Size of tax
pay Who benefits?
Price
without tax
Price sellers
receive
Demand
And the quantity declines.
0 Quantity Quantity Quantity
with tax without tax
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8-1a How a Tax Affects Market
Participants
• A tax places a wedge between the price buyers
pay and the price sellers receive.
• Because of this tax wedge, the quantity sold
falls below the level that would be sold without
a tax.
• The size of the market for that good shrinks.
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8-1 a How a Tax Affects Market
Participants
• Tax Revenue
• T = the size of the tax
• Q = the quantity of the good sold
• T Q = the government’s tax revenue
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Figure 2 Tax Revenue
Price
Supply
Price buyers Size of tax (T)
pay
Tax
revenue
(T × Q)
Price sellers
receive
Quantity Demand
sold (Q)
0 Quantity Quantity Quantity
with tax without tax
© 2007 Thomson South-Western
Figure 3 How a Tax Effects Welfare
Price
A Supply
Price
buyers = PB
pay
B
Price C
without tax = P1
E
Price D
sellers = PS
receive F
Demand
0 Q2 Q1 Quantity
© 2007 Thomson South-Western
Figure 3 How a Tax Effects Welfare
Price
deadweight loss Supply
Price A
buyers = PB
pay
B
Price C
without tax = P1
E
Price D
sellers = PS
receive F
Demand
0 Q2 Q1 Quantity
© 2007 Thomson South-Western
How a Tax Affects Market Participants
• Changes in Welfare
• A deadweight loss is the fall in total surplus that
results from a market distortion(市场扭曲), such as
a tax.
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How a Tax Affects Market Participants
• The change in total welfare includes:
• The change in consumer surplus,
• The change in producer surplus, and
• The change in tax revenue.
• The losses to buyers and sellers exceed the revenue
raised by the government.
• This fall in total surplus is called the deadweight
loss.
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Deadweight Losses and the Gains from
Trade
• Taxes cause deadweight losses because they
prevent buyers and sellers from realizing some
of the gains from trade.
• For example:
• Joe cleans Jane’s house each week for $100;
• Cost for joe $80; value for Jane is $120;
• Total surplus is $40.
• Now with tax $50.
• no trade happens.
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Figure 4 The Deadweight Loss
Price
Lost gains Supply
from trade
PB
Size of tax
Price
without tax
PS
Cost to
sellers Demand
Value to
buyers
0 Q2 Q1 Quantity
Reduction in quantity due to the tax
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1. Answers are at the end of the chapter.
1. A tax on a good has a deadweight loss if
a. the reduction in consumer and producer surplus is greater than the tax revenue.
b. the tax revenue is greater than the reduction in consumer and producer surplus.
c. the reduction in consumer surplus is greater than the reduction in producer surplus.
d. the reduction in producer surplus is greater than the reduction in consumer surplus.
a
2. Donna runs an inn and charges $300 a night for a room, which equals her cost. Sam,
Harry, and Bill are three potential customers willing to pay $500, $325, and $250,
respectively. When the government levies a tax on innkeepers of $50 per night of
occupancy, Donna raises her price to $350. The deadweight loss of the tax is
a. $25.
b. $50.
c. $100.
d. $150.
a
© 2007 Thomson South-Western
3. Sophie pays Sky $50 to mow her lawn every week. When the government levies a
mowing tax of $10 on Sky, he raises his price to $60. Sophie continues to hire him at
the higher price. What is the change in producer surplus, the change in consumer
surplus, and the deadweight loss?
a. $0, $0, $10
b. $0, 2$10, $0
c. +$10, -$10, $10
d. +$10, -$10, $0
b
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8-2 THE DETERMINANTS OF THE
DEADWEIGHT LOSS
• What determines whether the deadweight loss
from a tax is large or small?
– The magnitude of the deadweight loss depends on
how much the quantity supplied and quantity
demanded respond to changes in the price.
– That, in turn, depends on the price elasticities of
supply and demand.
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Figure 5 Tax Distortions and Elasticities
(a) Inelastic Supply
Price
Supply
When supply is
relatively inelastic,
the deadweight loss
of a tax is small.
Size of tax
Demand
0 Quantity
© 2007 Thomson South-Western
Figure 5 Tax Distortions and Elasticities
(b) Elastic Supply
Price
When supply is relatively
elastic, the deadweight
loss of a tax is large.
Size Supply
of
tax
Demand
0 Quantity
© 2007 Thomson South-Western
Figure 5 Tax Distortions and Elasticities
(c) Inelastic Demand
Price
Supply
Size of tax
When demand is
relatively inelastic,
the deadweight loss
of a tax is small.
Demand
0 Quantity
© 2007 Thomson South-Western
Figure 5 Tax Distortions and Elasticities
(d) Elastic Demand
Price
Supply
Size
of
tax Demand
When demand is relatively
elastic, the deadweight
loss of a tax is large.
0 Quantity
© 2007 Thomson South-Western
THE DETERMINANTS OF THE
DEADWEIGHT LOSS
• The greater the elasticities of demand and
supply:
– the larger will be the decline in equilibrium
quantity and,
– the greater the deadweight loss of a tax.
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4. If policymakers want to raise revenue by taxing goods while minimizing the
deadweight losses, they should look for goods with ________ elasticities of demand
and ________ elasticities of supply.
a. small; small
b. small; large
c. large; small
d. large; large
a
5. In the economy of Agricola, tenant farmers rent the land they use. If the supply of
land is perfectly inelastic, then a tax on land would have ________ deadweight losses,
and the burden of the tax would fall entirely on the __________.
a. sizable; farmers
b. sizable; landowners
c. no; farmers
d. no; landowners
d
© 2007 Thomson South-Western
6. Suppose the demand for grape jelly is perfectly elastic (because strawberry jelly is a
good substitute), while the supply is unit elastic. A tax on grape jelly would have
________ deadweight losses, and the burden of the tax would fall entirely on the
________ of grape jelly.
a. sizable; consumers
b. sizable; producers
c. no; consumers
d. no; producers
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8-3 DEADWEIGHT LOSS AND TAX
REVENUE AS TAXES VARY
• The Deadweight Loss Debate
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Figure 6 How Deadweight Loss and Tax Revenue Vary with
the Size of the Tax
(a) Small Tax
Price
Deadweight
loss Supply
PB
Tax revenue
PS
Demand
0 Q2 Q1 Quantity
© 2007 Thomson South-Western
Figure 6 How Deadweight Loss and Tax Revenue Vary with
the Size of the Tax
(b) Medium Tax
Price
Deadweight
PB loss
Supply
Tax revenue
PS Demand
0 Q2 Q1 Quantity
© 2007 Thomson South-Western
Figure 6 How Deadweight Loss and Tax Revenue Vary with
the Size of the Tax
(c) Large Tax
Price
PB
Deadweight
loss
Supply
Tax revenue
Demand
PS
0 Q2 Q1 Quantity
© 2007 Thomson South-Western
Figure 6 How Deadweight Loss and Tax Revenue Vary with
the Size of a Tax
(a) Deadweight Loss
Deadweight With each increase
Loss in the tax rate, the
deadweight loss of
the tax rises even
more rapidly than
the size of the tax.
0 Tax Size
© 2007 Thomson South-Western
DEADWEIGHT LOSS AND TAX
REVENUE AS TAXES VARY
• For the small tax, tax revenue is small.
• As the size of the tax rises, tax revenue grows.
• But as the size of the tax continues to rise, tax
revenue falls because the higher tax reduces
the size of the market.
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Figure 6 How Deadweight Loss and Tax Revenue Vary with
the Size of a Tax
(b) Revenue (the Laffer curve)
Tax
Revenue
0 Tax Size
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DEADWEIGHT LOSS AND TAX
REVENUE AS TAXES VARY
• As the size of a tax increases, its deadweight
loss quickly gets larger.
• By contrast, tax revenue first rises with the
size of a tax, but then, as the tax gets larger,
the market shrinks so much that tax revenue
starts to fall.
© 2007 Thomson South-Western
7. The Laffer curve shows that, in some circumstances, the government can reduce a
tax on a good and increase the
a. price paid by consumers.
b. equilibrium quantity.
c. deadweight loss.
d. government’s tax revenue.
d
8. Eggs have a supply curve that is linear and upward-sloping and a demand curve that
is linear and downward- sloping. If a 2 cent per egg tax is increased to 3 cents, the
deadweight loss of the tax
a. increases by less than 50 percent and may even decline.
b. increases by exactly 50 percent.
c. increases by more than 50 percent.
d. The answer depends on whether supply or demand is more elastic.
c
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9. Peanut butter has an upward-sloping supply curve and a downward-sloping demand
curve. If a 10 cent per pound tax is increased to 15 cents, the government’s tax revenue
a. increases by less than 50 percent and may even decline.
b. increases by exactly 50 percent.
c. increases by more than 50 percent.
d. The answer depends on whether supply or demand is more elastic.
© 2007 Thomson South-Western
CASE STUDY: The Laffer Curve and
Supply-side Economics
• The Laffer curve depicts the relationship
between tax rates and tax revenue.
• Supply-side economics refers to the views of
Reagan and Laffer who proposed that a tax cut
would induce more people to work and thereby
have the potential to increase tax revenues.
© 2007 Thomson South-Western
Summary
• A tax on a good reduces the welfare of buyers
and sellers of the good, and the reduction in
consumer and producer surplus usually
exceeds the revenues raised by the government.
• The fall in total surplus—the sum of consumer
surplus, producer surplus, and tax revenue —
is called the deadweight loss of the tax.
© 2007 Thomson South-Western
Summary
• Taxes have a deadweight loss because they
cause buyers to consume less and sellers to
produce less.
• This change in behavior shrinks the size of the
market below the level that maximizes total
surplus.
© 2007 Thomson South-Western
Summary
• As a tax grows larger, it distorts incentives
more, and its deadweight loss grows larger.
• Tax revenue first rises with the size of a tax.
• Eventually, however, a larger tax reduces tax
revenue because it reduces the size of the
market.
© 2007 Thomson South-Western
