MyECNclass.com Class Notes
by
1. Taxes reduce utility and are economically inefficient. Buyers and sellers respond to taxes by reducing their purchases or sales of the taxed goods. Since mutually consentual trade promotes efficiency by giving both buyers and sellers more utility than they would have without the trade, taxes reduce utility and thus efficiency.
2. An excise (per unit) tax can be shown as a vertical gap between the demand curve and the supply curve. Since the price is money per unit of a good, a tax that is basically additonal money per unit of the good can be measured on the price axis in a supply and demand diagram, so it can be measured vertically on that graph. On the diagram below, the tax is the red bar or line.
3. When an item is taxed, the price paid by buyer of the good will rise, while the price received by seller will fall, but neither price changes by the full amount of the tax. On the diagram above, the price paid by the buyer rises from Pe to PB . The price received by the seller falls from Pe to PS.
4. With a tax, the quantity traded falls because quantity demanded and quantity supplied are both lower. On the diagram above, the quantity of trade falls from Qe to QT.
5. After the tax is put in place, the difference between the buyers price and the sellers price is equal to the tax per unit. Again, this is shown as the red line or bar on the diagram above
6. Revenue to government is
(tax per unit) × QT,
or (PB − PS) × QT
This corresponds to the sum of the areas labelled "Tax Revenue" in the diagram below:
Total Excess Burden = | (PB - PS) × (Qe - QT) |
2 |
Copyright 2020 by Ray Bromley. For economics information, and other information about Ray Bromley, visit www.raybromley.com. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.
Send comments or suggestions to