Hello everyone, my name is Linh and I’m come from group 3.
My group consist of 10 members,
which is: ……………Today, we will take about chapter 8. In this chapter, we are going to see one
application of the concepts that we have learned in chapter 5 elasticity 6 and 7 producer and
consumer surplus which is the cost of taxation. Our presentation includes three main contents: the
deadweight loss of taxation, the determinants of the deadweight loss and deadweight loss and tax
revenue as taxes vary.
SLIDE 1:
The first main contents, we have: the deadweight loss of taxation. First, let’s answer together what is
tax? Tax is an amount of money collected by the government from individuals or businesses to fund
public activities.
SLIDE 2:
So, just let’s do a quick review if you remember a tax: drives a wedge between the price buyers pay
and the price sellers receive and it raises the price buyers pay, lowers the price sellers receive and
reduces the quantity both and sold. These effects are the same whether the text is imposed on
buyers or sellers.
SLIDE 3:
On this screen you see that the equilibrium price and quantity with our tax is labeled as PE and QE.
Now let’s impose a tax which is T dollars and if you remember this tax is going to create a wedge so
let’s see that buyers pay PB and sellers receive PS and the quantity here with tax is lower than the
equilibrium quantity without tax -> So revenue from the tax is going to be T dollars of tax.
This is the tax: times, QT (the amount of the quantities bought and sold in the market).
SLIDE 4:
From chapter 7 remember that total surplus is consumer surplus plus producer surplus and it
maximizes equilibrium with taxes consumer surplus decreases. Because why buyers are paying
higher prices PB and they are buying also lower than quantity QT.
Producer surplus decrease as well why because sellers receive PS which is lower than the equilibrium
price they receive without tax and they produce and sell lower quantity which is QT.
And government gains tax revenue which is tax T amount times the QT. -> So, what happens to total
surplus with tax.
SLIDE 5:
Let’s start without tax. Without tax if you remember producer surplus is the area between the
equilibrium price here and the demand curve. Therefore, it’s the triangular area a plus b plus c
producer surplus on the other hand is the area between the equilibrium price PE and the supply
curve. Therefore, it’s the area D plus E plus F and since there’s no text in the scenario tax revenue is
zero.
Now, total surplus is the sum of consumer surplus plus producer surplus therefore it’s A plus B plus C
plus D plus E plus F.
SLIDE 6:
Let’s see when the text is impulse with the tax: consumer surplus drops to a why because now the
buyers are paying PB price right and consumer surplus is the difference between the demand curve
here and the price buyers paid therefore it’s A and for producer surplus it’s also smaller area
produced to receive PS price and the supply curve so the area between PS and the supply curve is F.
But on the other hand, government is going to collect tax revenue which is B from buyers and D from
sellers. So, the tax revenue B plus D and total surplus is CS plus PS plus tax in this case a consumer
surplus F produce surplus B plus D which is tax revenue and total is A plus B plus D plus F
Now let’s compare the scenario without tax without text it was A plus B plus C plus D plus E plus F so
the text reduces total surplus by C plus E. We are now selling and buying less quantity so here there
is one buyer who is willing to pay PE but doesn’t want to pay PB this guy gets out from the market
there is a seller here whose cost is greater than PS so this guy doesn’t want to sell because making
negative return so this guy gets out therefore because of this distortion we have a smaller total
surplus so QE minus QT units not sold because of the tax.
SLIDE 7:
C + E is called the deadweight loss (DWL) of the tax, the fall in total surplus that results from a market
distortion, such as a tax.
EXAMPLE:
Now, we have examples of deadweight loss (DWL) in reality, such as:
1. Rent control (Example: Rental Price Ceiling in Ho Chi Minh City)
2. Tax on Goods (Example: Excise Tax on Tobacco, Alcohol)
3. Minimum Wage Policy (Example: Minimum Wage in Certain Industries)
SLIDE 8:
Next, we are going to talk about the second main contents in this chapter: The determinants of the
deadweight loss. In the first slide of part II, we need to answer the question: What determinations
the size of deadweight loss? Here, we have three main ideas to answer the above question:
1. First, the government should tax those goods or services with the smallest DWL to raise the
necessary revenue.
2. Second, DWL is small or large depending on the expansion of supply and demand.
3. Third, the price elasticity of demand (or supply) measures the amount by which QD (or QS)
changes when P changes.
