TAXATION The Effect of Taxation on Economic Welfare

Consumer and Producer Surplus without Tax Price 0 Quantity Quantity w/o tax Supply Demand Producer Surplus Consumer Surplus CS + PS = Economic Welfare Price w/o tax

The Effects of a Tax Price 价格 0 Quantity Quantity w/o tax Supply Demand Price w/o tax Price buyers pay Quantity with tax Size of tax Price sellers receive

Both consumers and producers are worse off Quantity 数量 0 Price Demand Supply Q1Q1 Q2Q2 Price Buyers Pay Price w/o tax Price sellers receive PS CS Decline in CS Decline in PS Tax Revenue But part of the lost surplus becomes tax revenue

Net effect of a tax on welfare: DWL Quantity 0 Price Demand Supply Q1Q1 Q2Q2 Price buyers pay Price w/o tax Price sellers receive PS CS Tax Revenue DWL

Where does the DWL come from? Quantity 0 Price Demand Supply Q1Q1 Price buyers pay Price sellers receive Q2Q2 Reduction in quantity due to the tax These transactions do not occur because of the tax Price w/o tax

Inelastic Supply Quantity Price Demand Supply 0 When supply is relatively inelastic, the deadweight loss of a tax is small. Size of tax

Elastic Supply Quantity Price Demand Supply 0 When supply is relatively elastic, the deadweight loss of a tax is large. Size of tax

Inelastic Demand Quantity Price Demand Supply 0 When demand is relatively inelastic, the deadweight loss of a tax is small. Size of tax

Elastic Demand Quantity Price Demand Supply 0 Size of tax When demand is relatively elastic, the deadweight loss of a tax is large.

The size of the tax matters: small tax Quantity Q2Q2 Price Q1Q1 Demand Supply Tax revenue Deadweight loss Price buyers pay Price sellers receive

Demand Supply Tax Revenue Quantity Q2Q2 Price Q1Q1 Deadweight loss The size of the tax matters: medium tax Price buyers pay Price sellers receive

Tax revenue Quantity Q2Q2 Price Q1Q1 Demand Supply Deadweight loss The size of the tax matters: large tax Price buyers pay Price sellers receive

If taxes always result in Dead Weight Loss, what good are they?

Purpose of Taxes Fund government expenditures Correct market failures Redistribute Income

Types of Taxes Tax on goods and services Tax on income and profits Taxes for social contributions

Taxes as % of GDP for EU countries €

Specific Taxes as % of GDP for EU countries Taxes on income and profit Taxes on goods and services Taxes for social contributions

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Taxes as % of GDP for OECD Countries