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Microecon, Chapter 6

by: Daria Trikolenko

Microecon, Chapter 6 ECON 2106

Daria Trikolenko

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Notes from Chapter 6
Class Notes
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This 6 page Class Notes was uploaded by Daria Trikolenko on Sunday October 9, 2016. The Class Notes belongs to ECON 2106 at Georgia State University taught by in Summer 2015. Since its upload, it has received 11 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Georgia State University.


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Date Created: 10/09/16
Chapter 6. The efficiency of market and the costs of taxation. Welfare economics- the branch of economics that studies how the allocation of resources affect economic well-being. Consumer surplus: Willingness to pay- the maximum price a consumer will pay for a good. Consumer surplus- difference between the willingness to pay for a good and the price tat is paid to get it. Whenever the price is greater than the willingness to pay, a rational consumer will decide not to buy. Producer surplus: Willingness to sell- the minimum price a seller will accept to sell a good or service. Producer surplus – the difference between the willingness to sell a good and the price that the seller receives. When determine willingness to sell, we should consider the direct cost of producing the good and the indirect cost (opportunity cost). When is a market efficient? Total surplus (social welfare) – adding consumer and producer surplus. Social welfare – it measures the welfare of society, best way to measure the benefits that market create. At equilibrium quantity output and consumption reach the largest possible combination of producer and consumer surplus. The Efficiency- Equity Debate Self-interest helps to ensure that all participants will benefit from an exchange, but doesn’t mean that each benefits equally. Equity – the fairness of the distribution of benefits among the members of a society. What do taxes create deadweight loss? Tax incidence: Excuse taxation – taxes levied on one particular good or service, account less than 4% of all tax revenues. Ex. Cigarettes taxes in different states Incidence of taxation – the burden of taxation on the party who pays the tax through higher prices. 1)the tax burden on the buyer shifts the curve down by the amount of the tax ($1). 2) the tax on the seller shifts the curve up by the amount of the tax ($1) Since equilibrium E2 higher, consumer reduce quantity demanded. Deadweight loss Deadweight loss- the decrease in economic activity caused by market distortion, such as taxes. Reduction in consumer and producer surplus. Tax revenue and deadweight loss when demand is inelastic Tax revenue and deadweight loss when demand is more elastic. Since quantity sold and bought in market decline, it creates deadweight loss. Tax revenue and deadweight loss when demand is highly elastic. When taxes added, consumer can switch the product for another, they won’t accept price increase. Tax effects: * producers less willing to sell at all prices. * causes the producer to net loss (offer less for sale) !!! Policymakers should tax goods with relatively inelastic demand.  When the demand curve is steeper (more inelastic) than the supply curve, consumer bear more at the incidence of the tax  When the supply curve is stepper than the demand curve, suppliers bear more of the incidence of tax.  Relatively steep-> deadweight loss is minimized. The short-lived luxury tax. Revenue fell far below expectation, thousands of jobs were lost in each of the affected industries (aircraft, yacht, fur), because demand for luxury goods are highly elastic.


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