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TAXATION
The Effect of Taxation on Economic Welfare
Consumer and Producer Surplus without Tax
Price
0 Quantity Quantity w/o tax
Supply
Demand
ProducerSurplus
ConsumerSurplus 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
Q1Q2
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
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Price
Demand
Supply
Q1Q2
Price buyers pay
Price w/o tax
Price sellers receive
PS
CS
TaxRevenue DWL
Where does the DWL come from?
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Price
Demand
Supply
Q1
Price buyers pay
Price sellers receive
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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 isrelatively inelastic,the deadweight loss of a tax is small.
Size of
tax
Elastic Supply
Quantity
Price
Demand
Supply
0
When supply isrelatively elastic,the deadweight loss of a tax is large.
Size of
tax
Inelastic Demand
Quantity
Price
Demand
Supply
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When demand isrelatively inelastic,the deadweight loss of a tax is small.
Size of
tax
Elastic Demand
Quantity
Price
Demand
Supply
0
Size of
tax
When demand isrelatively elastic,the deadweight loss of a tax is large.
The size of the tax matters: small tax
Quantity Q2
Price
Q1
Demand
Supply
Tax revenue
Deadweightloss
Price buyers pay
Price sellers receive
Demand
Supply
TaxRevenue
Quantity Q2
Price
Q1
Deadweightloss
The size of the tax matters: medium tax
Price buyers pay
Price sellers receive
Tax r
even
ue
Quantity Q2
Price
Q1
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 TaxesTax on goods and services
Tax on income
and profits
Taxes for social contributions
Taxes as % of GDP for EU countries
€
http://www.oecd-ilibrary.org/taxation/
Specific Taxes as % of GDP for EU countries
Taxes on income and profitTaxes on goods and servicesTaxes for social contributions
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Taxes as % of GDP for OECD Countries