Application: The Costs of Taxation 8 Application: The Costs of Taxation

Figure 1 The Effects of a Tax Price Demand Supply Price buyers pay Price sellers receive Quantity with tax Size of tax Price without tax Quantity Quantity Copyright © 2011 Cengage Learning

Figure 2 Tax Revenue Price Demand Supply Quantity with tax Price buyers pay Price sellers receive Tax revenue (T × Q) Size of tax (T) Quantity without tax Quantity sold (Q) Quantity Copyright © 2011 Cengage Learning

Figure 3 How a Tax Affects Welfare (1) Price Demand Supply = PB Q2 PS Price buyers pay sellers receive A F B D C E = P1 Q1 Price without tax Quantity Copyright © 2011 Cengage Learning

Figure 3 How a Tax Affects Welfare (2) Copyright © 2011 Cengage Learning

Figure 4 The Deadweight Loss Price Demand Lost gains from trade Supply PB Q2 PS Size of tax Price without tax Q1 Cost to sellers Value to buyers Quantity Reduction in quantity due to the tax Copyright © 2011 Cengage Learning

Figure 5 Tax Distortions and Elasticities (1) (a) Inelastic supply Price Demand Supply When supply is relatively inelastic, the deadweight loss of a tax is small. Size of tax Quantity Copyright © 2011 Cengage Learning

Figure 5 Tax Distortions and Elasticities (2) (b) Elastic supply Price Demand When supply is relatively elastic, the deadweight loss of a tax is large. Size of tax Supply Quantity Copyright © 2011 Cengage Learning

Figure 5 Tax Distortions and Elasticities (3) (c) Inelastic demand Price Supply Demand Size of tax When demand is relatively inelastic, the deadweight loss of a tax is small. Quantity Copyright © 2011 Cengage Learning

Figure 5 Tax Distortions and Elasticities (4) (d) Elastic demand Price Supply Demand Size of tax When demand is relatively elastic, the deadweight loss of a tax is large. Quantity Copyright © 2011 Cengage Learning

Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes (1) (a) Small tax Price Demand Deadweight loss Supply PB Q2 PS Tax revenue Q1 Quantity Copyright © 2011 Cengage Learning

Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes (2) (b) Medium tax Price Demand Deadweight loss PB Q2 PS Tax revenue Supply Q1 Quantity Copyright © 2011 Cengage Learning

Figure 6 Deadweight Loss and Tax Revenue from Three Taxes of Different Sizes (3) (c) Large tax Price PB Q2 PS Demand Tax revenue Deadweight loss Supply Q1 Quantity Copyright © 2011 Cengage Learning

Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax (1) (a) Deadweight loss Deadweight loss Tax size Copyright © 2011 Cenage Learning

Figure 7 How Deadweight Loss and Tax Revenue Vary with the Size of a Tax (2) (b) Revenue (the Laffer curve) Tax revenue Tax size Copyright © 2011 Cengage Learning