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Principle of Microeconomics week 6, lecture 8

by: Meg

Principle of Microeconomics week 6, lecture 8 EC 101 AA

Marketplace > Boston University > EC 101 AA > Principle of Microeconomics week 6 lecture 8

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These notes cover the slides in class as well as brief notes on the assigned reading
Principles of Economics: Microeconomics
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This 6 page Class Notes was uploaded by Meg on Friday October 14, 2016. The Class Notes belongs to EC 101 AA at Boston University taught by Edson in Fall 2016. Since its upload, it has received 28 views.


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Date Created: 10/14/16
Chapter 8: Vocabulary: ● Deadweight loss: ​ the fall in total surplus that results when a tax distorts a market outcome Main Ideas: ● When a tax is levied on buyers, the demand curve shifts downward by size of tax; when tax levied on suppliers, supply curve shifts upward by same amount ● Elasticities of supply and demand determine how the tax burden is distributed between producers and consumers ● A tax on a good causes the size of the market to shrink ● Government gets total tax revenue (TxQ) ○ Use this to determine benefit of tax ● Welfare tax makes buyers and sellers worse off and government better off ○ Raises price buyers pay → incentive to consume less ○ Lowers price sellers receive → incentive to produce less ● Taxes cause deadweight loss because they prevent buyers and sellers from realizing some of the gains from trade; incentives for buyers and sellers to change behavior ● Price elasticity determines whether deadweight loss from a tax is large or small ○ The greater the elasticity, the greater the deadweight loss ● Laffer suggested a cut in tax rates could increase tax revenue ○ Correct in theory but doubt in practice ○ Impossible to test under the right conditions (ceteris paribus unreachable in real life)


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