The Economic Implication of Taxes

PowerPoint® Slides by Can Erbil

© 2004 Worth Publishers, all rights reserved© 2004 Worth Publishers, all rights reserved

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The Market for Taxi Rides in the Absence of Government Controls

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Effect of a Quota on the Market for Taxi Rides

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Effect of an Excise Tax Levied on the Sales of Taxi Rides

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Effect of an Excise Tax Levied on Purchases of Taxi Rides

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The Revenue from an Excise Tax

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Tax incidence Who bears the burden of the tax?

Excess burden or Deadweight loss Taxes impose additional costs, over and above

the money actually paid in taxes, in the form of inefficiencies, which occur because the tax discourages mutually beneficial transactions

Tax revenue = Area of Wedge(height and width)

Excise Tax: Key Terms

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Elasticity determines tax incidence: An Excise Tax Paid Mainly by Producers

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Elasticity determines tax incidence: An Excise Tax Paid Mainly by Consumers

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Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax

A tax causes a deadweight loss to society, because less of the good is produced and consumed than in the absence of the tax. As a result, some mutually beneficial trades between producers and consumers do not take place.

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A Tax Reduces Consumer and Producer Surplus

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The Deadweight Loss of a Tax

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Deadweight Loss and ElasticitiesThe general rule for economic policy is that other things equal, you want to choose the policy that produces the smallest deadweight loss. But how can we predict the size of the deadweight loss associated with a given policy?

For a tax imposed when demand or supply, or both, is inelastic will cause a relatively small decrease in quantity transacted and a small deadweight loss.

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