princ-ch08-presentation(2010).ppt

Application TheCostsofTaxation Economics PRINCIPLESOF N GregoryMankiw PremiumPowerPointSlidesbyRonCronovich 8 Inthischapter lookfortheanswerstothesequestions Howdoesataxaffectconsumersurplus producersurplus andtotalsurplus Whatisthedeadweightlossofatax Whatfactorsdeterminethesizeofthisdeadweightloss Howdoestaxrevenuedependonthesizeofthetax 1 APPLICATION THECOSTSOFTAXATION 2 ReviewfromChapter6 Ataxdrivesawedgebetweenthepricebuyerspayandthepricesellersreceive raisesthepricebuyerspayandlowersthepricesellersreceive reducesthequantitybought sold Theseeffectsarethesamewhetherthetaxisimposedonbuyersorsellers sowedonotmakethisdistinctioninthischapter APPLICATION THECOSTSOFTAXATION 3 TheEffectsofaTax Eq mwithnotax Price PEQuantity QE Eq mwithtax Tperunit SellersreceivePS Quantity QT BuyerspayPB APPLICATION THECOSTSOFTAXATION 4 TheEffectsofaTax D S Revenuefromtax TxQT PE QE QT APPLICATION THECOSTSOFTAXATION 5 TheEffectsofaTax Next weapplywelfareeconomicstomeasurethegainsandlossesfromatax Wedetermineconsumersurplus CS producersurplus PS taxrevenue andtotalsurpluswithandwithoutthetax Taxrevenuecanfundbeneficialservices e g education roads police soweincludeitintotalsurplus APPLICATION THECOSTSOFTAXATION 6 TheEffectsofaTax Withoutatax QT A B C D E F CS A B C PS D E F Taxrevenue 0 Totalsurplus CS PS A B C D E F APPLICATION THECOSTSOFTAXATION 7 TheEffectsofaTax D S QE QT A B C D E F CS A PS F Taxrevenue B D Totalsurplus A B D F Withthetax ThetaxreducestotalsurplusbyC E APPLICATION THECOSTSOFTAXATION 8 TheEffectsofaTax D S QE QT A B C D E F C Eiscalledthedeadweightloss DWL ofthetax thefallintotalsurplusthatresultsfromamarketdistortion suchasatax APPLICATION THECOSTSOFTAXATION 9 AbouttheDeadweightLoss D S QE QT Becauseofthetax theunitsbetweenQTandQEarenotsold Thevalueoftheseunitstobuyersisgreaterthanthecostofproducingthem sothetaxpreventssomemutuallybeneficialtrades ACTIVELEARNING1Analysisoftax 10 A ComputeCS PS andtotalsurpluswithoutatax B If 100taxperticket computeCS PS taxrevenue totalsurplus andDWL Themarketforairplanetickets ACTIVELEARNING1AnswerstoA 11 CS x 200 x100 10 000 Totalsurplus 10 000 10 000 20 000 PS x 200 x100 10 000 Themarketforairplanetickets ACTIVELEARNING1AnswerstoB 12 CS x 150 x75 5 625 Totalsurplus 18 750 PS 5 625 Taxrevenue 100 x75 7 500 DWL 1 250 A 100taxonairplanetickets APPLICATION THECOSTSOFTAXATION 13 WhatDeterminestheSizeoftheDWL Whichgoodsorservicesshouldgovttaxtoraisetherevenueitneeds Oneanswer thosewiththesmallestDWL WhenistheDWLsmallvs large Turnsoutitdependsonthepriceelasticitiesofsupplyanddemand Recall Thepriceelasticityofdemand orsupply measureshowmuchQD orQS changeswhenPchanges APPLICATION THECOSTSOFTAXATION 14 Whensupplyisinelastic it sharderforfirmstoleavethemarketwhenthetaxreducesPS So thetaxonlyreducesQalittle andDWLissmall DWLandtheElasticityofSupply APPLICATION THECOSTSOFTAXATION 15 DWLandtheElasticityofSupply Themoreelasticissupply theeasierforfirmstoleavethemarketwhenthetaxreducesPS thegreaterQfallsbelowthesurplus maximizingquantity thegreatertheDWL APPLICATION THECOSTSOFTAXATION 16 DWLandtheElasticityofDemand Whendemandisinelastic it sharderforconsumerstoleavethemarketwhenthetaxraisesPB So thetaxonlyreducesQalittle andDWLissmall APPLICATION THECOSTSOFTAXATION 17 DWLandtheElasticityofDemand Themoreelasticisdemand theeasierforbuyerstoleavethemarketwhenthetaxincreasesPB themoreQfallsbelowthesurplus maximizingquantity andthegreatertheDWL WouldtheDWLofataxbelargerifthetaxwereon A Breakfastcerealorsunscreen B Hotelroomsintheshortrunorhotelroomsinthelongrun C Groceriesormealsatfancyrestaurants ACTIVELEARNING2ElasticityandtheDWLofatax 18 A BreakfastcerealorsunscreenFromChapter5 Breakfastcerealhasmoreclosesubstitutesthansunscreen sodemandforbreakfastcerealismoreprice elasticthandemandforsunscreen So ataxonbreakfastcerealwouldcausealargerDWLthanataxonsunscreen ACTIVELEARNING2Answers 19 B HotelroomsintheshortrunorlongrunFromChapter5 Thepriceelasticitiesofdemandandsupplyforhotelroomsarelargerinthelongrunthanintheshortrun So ataxonhotelroomswouldcausealargerDWLinthelongrunthanintheshortrun ACTIVELEARNING2Answers 20 C GroceriesormealsatfancyrestaurantsFromChapter5 Groceriesaremoreofanecessityandthereforelessprice elasticthanmealsatfancyrestaurants So ataxonrestaurantmealswouldcausealargerDWLthanataxongroceries ACTIVELEARNING2Answers 21 Thegovernmentmustraisetaxrevenuetopayforschools police etc Todothis itcaneithertaxgroceriesormealsatfancyrestaurants Whichshouldittax ACTIVELEARNING3Discussionquestion 22 APPLICATION THECOSTSOFTAXATION 23 HowBigShouldtheGovernmentBe Abiggergovernmentprovidesmoreservices butrequireshighertaxes whichcauseDWLs ThelargertheDWLfromtaxation thegreatertheargumentforsmallergovernment Thetaxonlaborincomeisespeciallyimportant it sthebiggestsourceofgovtrevenue Forthetypicalworker themarginaltaxrate thetaxonthelastdollarofearnings isabout40 HowbigistheDWLfromthistax Itdependsonelasticity APPLICATION THECOSTSOFTAXATION 24 HowBigShouldtheGovernmentBe Iflaborsupplyisinelastic thenthisDWLissmall Someeconomistsbelievelaborsupplyisinelastic arguingthatmostworkersworkfull timeregardlessofthewage APPLICATION THECOSTSOFTAXATION 25 HowBigShouldtheGovernmentBe Othereconomistsbelievelabortaxesarehighlydistortingbecausesomegroupsofworkershaveelasticsupplyandcanrespondtoincentives Manyworkerscanadjusttheirhours e g byworkingovertime Manyfamilieshavea2ndearnerwithdiscretionoverwhetherandhowmuchtowork Manyelderlychoosewhentoretirebasedonthewagetheyearn Somepeopleworkinthe undergroundeconomy toevadehightaxes APPLICATION THECOSTSOFTAXATION 26 TheEffectsofChangingtheSizeoftheTax Policymakersoftenchangetaxes raisingsomeandloweringothers WhathappenstoDWLandtaxrevenuewhentaxeschange Weexplorethisnext APPLICATION THECOSTSOFTAXATION 27 DWLandtheSizeoftheTax causestheDWLtomorethandouble Doublingthetax Initially thetaxisTperunit APPLICATION THECOSTSOFTAXATION 28 DWLandtheSizeoftheTax T causestheDWLtomorethantriple Triplingthetax Initially thetaxisTperunit APPLICATION THECOSTSOFTAXATION 29 DWLandtheSizeoftheTax SummaryWhenataxincreases DWLrisesevenmore ImplicationWhentaxratesarelow raisingthemdoesn tcausemuchharm andloweringthemdoesn tbringmuchbenefit Whentaxratesarehigh raisingthemisveryharmful andcuttingthemisverybeneficial APPLICATION THECOSTSOFTAXATION 30 RevenueandtheSizeoftheTax Whenthetaxissmall increasingitcausestaxrevenuetorise 0 APPLICATION THECOSTSOFTAXATION 31 RevenueandtheSizeoftheTax 2T Whenthetaxislarger increasingitcausestaxrevenuetofall 0 APPLICATION THECOSTSOFTAXATION 32 TheLaffercurveshowstherelationshipbetweenthesizeofthetaxandtaxr