Chapter 8

Chapter 8 talks of how our study of taxes in Chapter 6 can affect the economic well being of the people in the market. When a tax is put in place, the price paid by buyers rises and the price received by sellers falls. The burden is shared by both the buyers and sellers, no matter how a tax is levied. Total tax revenue is measured by multiplying the size of the tax (T) by the quantity of the good sold (Q). A fall in total surplus is a consequence of when a tax distorts a market outcome and shrinks the market, which is called deadweight loss. The losses of sellers and buyers from a tax exceeds the revenue raised by the government. Taxes distort people's incentives, so markets use their resources inefficiently. Taxes cause deadweight losses because they block buyers and sellers from realizing some benefits and gains from trade. The greater the elasticities of supply and demand, the greater deadweight loss of a tax. As the size of a tax increases, its deadweight loss gets larger fast. Oppositely, tax revenue initially rises with the size of the tax; but as the tax gets larger, the market shrinks so the tax revenue starts to fall. To determine how much revenue the government receives of losses from implementing a new tax, one needs to observe the tax rates and how it affects people's behavior. I thought the chapter was intriguing because it took concepts from chapter 6 to explain the new topics in this chapter. I thought the graphs examining tax distortions and elasticities was extremely helpful in visualizing these topics.