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Chapter 16
Taxes
Part II (Deadweight loss of a tax (Consumer surplus is…
Chapter 16
Taxes
Part II
Tax
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Whereas in an untaxed market, Pd=Ps,
taxes create a difference Pd and Ps
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Value tax
A value tax will also have the same effects on Pd, Ps and Q regardless of who it is levied on
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With a value tax, the relationship between Pd and Ps (regardless of who pays the tax) becomes 
Incidence of the tax
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Elasticity is fined as percentage change in quantity divided by the percentage change in price
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Deadweight loss of a tax
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With a tax applied, some surplus has been redistributed from consumers and producers to the government
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The deadweight loss measures the value of the transactions that do not take place due to the market distortion. The after-tax allocation is also not Pareto efficient