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

Quantity 0

Price

Demand

Supply

Q1Q2

Price buyers pay

Price w/o tax

Price sellers receive

PS

CS

TaxRevenue DWL

Where does the DWL come from?

Quantity 0

Price

Demand

Supply

Q1

Price buyers pay

Price sellers receive

Q2

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

0

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