Transcript Mod 50 - Deadweight Loss and Efficiency

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Deadweight Loss and
Efficiency
Why pay taxes?
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Consumer and Producer Surplus
Efficiency and Deadweight Loss
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In a market, there are gains to be made from trade.
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Producers AND consumers benefit, and the efficiency of a market, the
point where no one can be made better off without
making others worse, is the reason why.
Efficiency
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Can you improve on a market? Many have tried.
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Consumer and Producer Surplus
 Reallocate
consumption?
 Reduces consumer surplus, takes items away from
someone how values them more, and gives them to
consumers who value these items less.
 Reallocate sales among sellers?
 Increases total cost and reduces producer surplus
 Changes in Quantity traded?
 Shortages and Surpluses!
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Consumer and Producer Surplus
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If market is at equilibrium, there is no way to increase gains from
trade!
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HOWEVER…
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Any other outcome reduces total surplus
Just because a market is efficient does not mean it is fair.
Equity
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Also, markets sometimes fail, and fail to deliver efficiency. (no
longer maximizing total surplus)
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Consumer and Producer Surplus
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Equity and Efficiency
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Society does care about what is fair, and markets can not always
fill this need.
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MUST sacrifice efficiency for fairness in some cases.
Taxes
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Progressive
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Regressive
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Proportional (flat)
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Excise (sales)
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Consumer and Producer Surplus
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Excise Tax on Quantities and Prices
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Tax imposed on hotel owners
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Consumer and Producer Surplus
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Tax imposed on consumers.
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Tax incidence- WHO really pays the tax? And how much?
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Consumer and Producer Surplus
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Elasticity and effect on tax incidence
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When consumers pay most of the tax!
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Consumer and Producer Surplus
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When producers pay most of the tax!
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Consumer and Producer Surplus
Benefits of Taxation
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Revenue
(Tax per unit) X Qd= Tax Revenue
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Consumer and Producer Surplus
Costs of Taxation
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Deadweight Loss
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Prevents mutually beneficial transactions…
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Like a quota, creates deadweight loss.
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Consumer and Producer Surplus
Other Specific Costs:
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Administrative- not shown in deadweight loss, but how much does it cost to
collect the tax, and pay for it?
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Alternatives?
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Lump-sum tax example- Fair? (same for all)
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British poll taxes
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NO… unfair. BUT, incredibly efficient
Value Added Taxes (VAT)?
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Some claim fair and efficient
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EX: Carbon Taxes