This chapter introduces consumer and producer surplus. Consumer surplus is the difference between what buyers would have been willing to pay and what they actually had to pay. Producer surplus is the difference between what sellers would have been willing to accept and what they actually received as payment. This chapter also looks at the costs and benefits of taxation. We find that the person who physically pays a tax is not necessarily the person who bears the burden of the tax. | Taxation and Government Intervention Chapter 7 Laugher Curve Two economists meet on the street. Q. How’s your wife? A. Relative to what? Taxation and Government Government needs tax revenues to function. How Much Should Government Tax? In order to answer how much government should tax, we must know the costs and benefits of taxation. The benefits result from the roles of government. How Much Should Government Tax? From previous chapters we know that government’s roles include: Providing a stable set of institutions and rules. Promoting effective and workable competition. Correcting for externalities. How Much Should Government Tax? From previous chapters we know that government’s roles include: Creating an environment that fosters economic stability and growth. Providing public goods. Adjusting for undesirable market results. The Costs of Taxation The costs of taxation include: The direct cost of the revenue paid to government The loss of consumer and producer surplus caused by the tax The administrative costs of collecting the tax. The Costs of Taxation When government raises taxes, there is a loss of consumer and producer surplus that is not gained by government. This is known as deadweight loss. The Costs of Taxation Graphically the deadweight loss is shown on a supply-demand curve as the welfare loss triangle. The welfare loss triangle – a geometric representation of the welfare loss in terms of misallocated resources caused by a deviation from a supply-demand equilibrium. The Costs of Taxation Fig. 7-2, p 162 S1= S0+t P1–t Quantity Price P0 Q0 P1 Q1 Producer surplus S0 Demand Consumer surplus Deadweight loss tax A F C E B D The Costs of Taxation There are additional costs of taxation. Resources must be allocated by government to collect the tax and by individuals to comply with it. The Benefits of Taxation The benefits of taxation are the goods and services that government provides. The Benefits of Taxation Some of these benefits are the part of the basic . | Taxation and Government Intervention Chapter 7 Laugher Curve Two economists meet on the street. Q. How’s your wife? A. Relative to what? Taxation and Government Government needs tax revenues to function. How Much Should Government Tax? In order to answer how much government should tax, we must know the costs and benefits of taxation. The benefits result from the roles of government. How Much Should Government Tax? From previous chapters we know that government’s roles include: Providing a stable set of institutions and rules. Promoting effective and workable competition. Correcting for externalities. How Much Should Government Tax? From previous chapters we know that government’s roles include: Creating an environment that fosters economic stability and growth. Providing public goods. Adjusting for undesirable market results. The Costs of Taxation The costs of taxation include: The direct cost of the revenue paid to government The loss of consumer and producer surplus caused by the .
