The Principles of Economics 

8      Application: The Costs of Taxation

8-1 The Deadweight Loss of Taxation

8-1a How a Tax Affects Market Participants

-Buyers and sellers are hurt by the taxing of goods because the costs to them are exceeded by the revenue raised by the government. 

-Whether a tax is levied on buyers and sellers or not, the impact of a tax on a market outcome remains the same. 

-Taxes on goods result in markets that include those goods to shrink.

-Tax revenue tells how much the public benefits from the tax. 

-Welfare without a tax - total surplus is the area between supply and demand up to an equilibrium. 

-Welfare with a tax - total surplus is consumer surplus + producer surplus + tax revenue . 

-deadweight loss: the fall in total surplus that results from a market distortion, such as the tax. 

8-1b Deadweight Losses and the Gains from Trade 

-Taxes typically cause deadweight losses, refraining buyers and sellers from realizing the gains of trading. 

8-2 The Determinants of the Deadweight Loss

-More deadweight losses results in greater elasticity because people react more to changes in prices. 

-The gains from trade are less than taxes.

-The underground economy is when people engage in illegal economic activity, such as drug trades. 

8-3 Deadweight Loss and Tax Revenue as Taxes Vary

-As taxes rise, so does the deadweight loss. 

-When attempting to reduce high taxes, the tax revenue would actually increase. When taxes are cut, people are encouraged to increase their quantity of labor. 

-Greater elasticity calls for more of an increase in tax revenue. 

8-4 Conclusion

-Microeconomics: how to design a successful tax system while balancing equality and efficiency.

-Macroeconomics: how taxes influence the economy and how policymakers use the system to stabilize the economy.