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Week 5: Market Outcomes and Tax Incidents - Coggle Diagram
Week 5: Market Outcomes and Tax Incidents
Welfare Economics
Consumer Surplus
Difference between willingness to pay and the amount that is paid for that good
Measures the gain that accrues to the buyer
Its size is determined by the market price
Producer Surplus
Difference between the willingness to sell a good and the price the seller receives
They represent the net gain of the seller in the market
Total surplus is the sum of CS & PS
It measures the overall welfare in society
An outcome is efficient when the allocation of resources maximizes total surplus
Taxation
Excise Tax
a tax on a specific good (alcohol, tobacco, petrol)
6% of overall tax revenue
Tax incidence
Refers to the party who bears the burden of the tax (consumers or producers)
Tax on buyers results on decrease in demand
Creates a wedge between buyers and sellers affecting bot buyers and sellers
Tax on suppliers rusts on a price increase
Again creating a wedge and affecting consumers
Key word in tax incidence is elasticity
End result is that burden will be shared between consumers and suppliers
Deadweight Loss
We know that a tax will hurt buyers and sellers
A
Deadweight Loss
is the decrease in economic activity caused by market distortions
Bad sign for an economy or inefficiency
Tax and deadweight loss with inelastic demand
Tax incidence is the same no matter who the tax is levied on
Why would a government want to tax a good with inelastic demand?
No substitutes = lot of revenue for the government
Amount of purchases will not change much (or not change at all if perfect inelastic demand)
This means no deadweight loss