1. the only 2 things curtain in life and economics are… Deadweight loss & taxes

2. The Gains from Trade
Total surplus, the sum of consumer and producer surpluses, the total net gain to consumers and producers from trading in a market.
Let’s see how total surplus can be visualized in a graph of the market for used textbooks.

3. The Gains from Trade
The sum of the blue and the pink areas is total surplus (the green triangle), the total benefit to society from the production and consumption of the good.
Producer surplus is given by the pink area, the area above the supply curve but below the price.
Consumer surplus is given by the blue area, the area below the demand curve but above the price.
In the market for used textbooks, the equilibrium price is $60 and the equilibrium quantity is 1,000 books.

4. The Efficiency of Markets
A market is efficient if, once the market has produced its gains from trade, there is no way to make some people better off without making other people worse off.
Let’s see what happens to surpluses if we try to “improve” the outcome of an efficient market by:
1) Reallocating consumption among consumers
Reallocating sales among sellers
3) Changing the quantity traded

5. Three caveats about efficient markets:
The Efficiency of Markets
If a market is in equilibrium, there is no way to increase the gains from trade.
Three caveats about efficient markets:
Efficient markets are not always fair or equitable.
Some markets fail to deliver efficiency.
Maximizing total surplus does not mean everyone benefits. Buyers with low willingness or ability to pay and sellers with high cost will lose out.

6. Equity and Efficiency
There is often a trade-off between equity and efficiency: policies that promote equity can sometimes decrease efficiency, and policies that promote efficiency can sometimes decrease equity.
Improving equity can be difficult because equity is harder to define than efficiency. What is equitable to some may not be to others.
The trade-off between equity and efficiency is easy to see when we look at different policies of taxation.

7. Equity and Efficiency
A tax in which high-income taxpayers pay a smaller % of income than low-income taxpayers is a regressive tax.
A tax in which all taxpayers pay the same % of income is a proportional tax.
A tax in which high-income taxpayers pay a larger % of income than low-income taxpayers is a progressive tax.
The current U.S. income tax system is progressive. The wealthier pay a higher % of their income.

8. Equity and Efficiency
A progressive tax is the most equitable form of taxation—it forces those with more to pay a higher tax rate, relieving the tax burden on the poorest taxpayers.
But some argue that by disincentivizing workers to earn more (because their taxes then go up), the progressive tax is an inefficient form of taxation.
We’ll now examine ways to measure the efficiency losses that come under various types of taxation.

9. Effects of Excise Taxes on Quantity & Price
An excise tax is a tax on sales of a particular good or service.
In the absence of taxes, the equilibrium price of hotel rooms is $80 per night, and the equilibrium number of rooms rented is 10,000 per night (shown by point E).
But post-excise tax, hotel owners are willing to supply 5000 only at a price of $100 per night: $60 for themselves plus $40 paid to the government as tax.
This implies that the post-tax supply curve shifts up by the amount of the tax compared to the pre-tax supply curve, which can be seen in the next graph.

10. Effects of Excise Taxes on Quantity & Price
Although hotel owners pay the tax, they actually bear only half the burden: the price they receive net of tax falls only $20, from $80 to $60.
The equilibrium price of hotel rooms rises from $80 to $100 per night, and the equilibrium quantity of rooms rented falls from 10,000 to 5,000.
A $40 per room tax imposed on hotel owners shifts the supply curve from S1 to S2, an upward shift of $40.
Guests who rent rooms bear the other half of the burden because the price they pay rises by $20, from $80 to $100.

11. Effects of Excise Taxes on Quantity & Price
Although in this case the tax is officially paid by consumers (while in Figure 50.6 the tax was paid by producers), the outcome is the same: after taxes, hotel owners receive $60 per room but guests pay $100.
The equilibrium price of hotel rooms falls from $80 to $60, and the quantity of rooms rented falls from 10,000 to 5,000.
A $40 per room tax imposed on hotel guests shifts the demand curve from D1 to D2, a downward shift of $40.

12. Effects of Excise Taxes on Quantity & Price
As we have seen, a tax on a good of a certain amount or % per unit, such as a $1 per unit excise tax or a 5% sales tax, increases the equilibrium price and decreases the equilibrium quantity.
We’ve also seen that for an excise tax, it doesn’t matter who officially pays the tax—the equilibrium outcome is the same.

13. Price Elasticities and Tax Incidence
Tax incidence is the distribution of the tax burden—or who pays what % of the tax burden out of producers or consumers.
The incidence of an excise tax depends on the price elasticity of supply and the price elasticity of demand.

14. An Excise Tax Paid Mainly by Consumers
The price paid by consumers rises $0.95 to $2.95, reflecting the fact that most of the burden of the tax falls on consumers.
Only a small portion of the tax is borne by producers: the price they receive falls by only $0.05 to $1.95.
The pre-tax price of a gallon of gasoline is $2.00 when a tax of $1.00 per gallon is imposed.
This relatively steep demand curve reflects a price-inelastic demand for gasoline.
The relatively flat supply curve reflects a price-elastic supply.

15. An Excise Tax Paid Mainly by Producers
When a tax of $5.00 per day is imposed on parking spaces, the price received by producers falls by $4.50, reflecting the fact that they bear most of the tax burden.
This relatively flat demand curve reflects a price-elastic demand for downtown parking, and the relatively steep supply curve reflects a price-inelastic supply.
The price paid by consumers rises $0.50, reflecting the fact that consumers bear little of the burden.

16. The Revenue from an Excise Tax
Revenue equals the tax rate ($40, or the size of the wedge that the tax drives between the supply price and the demand price) multiplied by the number of rooms rented (5,000).
The revenue from a $40 excise tax on hotel rooms is $200,000.
This revenue is also represented by the area of the shaded rectangle.

17. The Costs of Taxation
The deadweight loss (from a tax) is the drop in total surplus resulting from the tax minus any tax revenues generated.

18. The Costs of Taxation
Areas B and F represent the losses to consumer and producer surplus that are not collected by the government as revenue; they are the deadweight loss to society caused by the tax.
The government receives revenue from the tax that equals QT × T. This revenue is represented by the sum of areas A and C.
After an excise tax of T per unit is imposed, the price to consumers rises to PC and consumer surplus falls by the sum of dark blue rectangle A, and light blue triangle B.
Before a tax, equilibrium price and quantity are PE and QE.
The tax also causes the price to producers to fall to PP and producer surplus falls by the sum of red rectangle C and pink triangle F.

19. The Costs of Taxation
The administrative costs of a tax are the resources used by the government to collect the tax, and by taxpayers to pay (or to evade) the tax. These costs are in addition to the normal costs and benefits of the tax.
A lump-sum tax is a tax of a fixed amount paid by all taxpayers.
Unless they cause a producer to go out of business, lump-sum taxes do not affect price or quantity, so they do not create deadweight loss.

20. Lets look at the Luxury tax (the history Supreme – price tag =4
Lets look at the Luxury tax (the history Supreme – price tag =4.8 billion, the worlds most expensive yacht

25. Did this actually help?
In 1990, Congress adopted a new luxury tax on items that only the rich could afford. The goal of this tax is to raise revenue from those who could easily afford to pay

26. Summary and Review
1) What is added together to arrive at the total surplus?
Total consumer surplus plus total producer surplus.
2) When markets are efficient, what point maximizes the total surplus?
Equilibrium price and quantity.

27. Summary and Review
3) Just because a market is efficient doesn’t mean it is _____.
fair (or equitable)
4) What is the effect of an excise tax on price paid by consumers and price received by producers?
Price paid by consumers goes up and price received by producers goes down, driving a wedge between the two.

28. Summary and Review
5) How the tax burden is divided between consumers and producers is called what?
Tax incidence.
6) On what does tax incidence depend?
Elasticity.
If price elasticity of demand exceeds price elasticity of supply, the tax incidence falls more on producers; if price elasticity of supply exceeds price elasticity of demand, the tax incidence falls more on consumers.

29. Summary and Review 7) How is tax revenue calculated?
Tax revenue equals the area of a rectangle with the height of the tax wedge between the supply price and the demand price and the width of the quantity sold under the tax.
8) What is deadweight loss of a tax?
The lost total surplus representing the value of all the transactions that do not occur because of the tax.

30. Summary and Review
9) What are the costs of implementing and paying (or avoiding a tax called?
Administrative costs.
10) Why doesn’t everyone simply support the most efficient tax?
Because there is often a trade-off between efficiency and equity.

31. Summary and Review 11) Which type of tax has no deadweight loss?
A lump-sum tax.
12) Rank the other three types of taxation in terms of their relative efficiency and equity.
Progressive taxes are inefficient but equitable; regressive taxes are efficient but inequitable; proportional taxes fall somewhere in the middle.

32. Walkthrough: Free-Response Question 1
1. Refer to the graph. Assume the government has imposed an excise tax of $60 on producers in this market. a. What quantity will be sold in the market? b. What price will consumers pay in the market? c. By how much will consumer surplus change as a result of the tax? d. By how much will producer surplus change as a result of the tax? e. How much revenue will the government collect from this excise tax? f. Calculate the deadweight loss created by the tax. (6 points)
1 point: 1,000
1 point: $90
1 point: $60 × 1,000 = $60,000
1 point: Consumer surplus will decrease by $45,000, from ½ ($2,000 × 60 = $60,000 before the tax to ½ ($1,000 × 30) = $15,000 after the tax.
1 point ½ × $60 × 1,000 = $30,000
1 point: Producer surplus will decrease by $45,000, from ½ ($2,000 × 60) = $60,000 before the tax to ½ ($1,000 × 30) = $15,000 after the tax.