Download Micro_Module 50-14

Module
Micro: 14
Econ: 50
Efficiency and
Deadweight Loss
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The meaning and importance of total
surplus and how it can be used to
illustrate efficiency in markets
• How taxes affect total surplus and can
create deadweight loss
Consumer Surplus, Producer
Surplus, And Efficiency
• Gains from trade
• The efficiency of
markets
• Equity and Efficiency
Gains from Trade
• Any time a consumer makes a purchase from a
producer, a trade has been made and both
parties expect to gain.
• Gains from trade are represented by consumer
and producer surplus.
• At the market equilibrium price and quantity, total
surplus is the sum of the CS and PS triangles.
The Efficiency of Markets
• No reallocation of consumption among consumers
could increase consumer surplus
• No reallocation of sales among producers could
increase producer surplus
• No change in the quantity traded could increase
total surplus
The Efficiency of Markets
• Summary: An efficient market performs four
important functions:
• 1. It allocates consumption of the good to
the potential buyers who most value it, as
indicated by the fact that they have the
highest willingness to pay.
• 2. It allocates sales to the potential sellers
who most value the right to sell the good, as
indicated by the fact that they have the lowest
cost.
The Efficiency of Markets
• Summary: An efficient market performs four
important functions:
• 3. It ensures that every consumer who makes a
purchase values the good more than every seller
who makes a sale, so that all transactions are
mutually beneficial.
• 4. It ensures that every potential buyer who
doesn’t make a purchase values the good less than
every potential seller who doesn’t make a sale, so
that no mutually beneficial transactions are
missed.
Equity and Efficiency
• Efficiency is not society’s only concern. We are
also concerned with equity.
• What is considered “fair” or “equitable” depends
on many factors.
• Often equity and efficiency are at the root of the
debate surrounding taxes.
• Progressive, regressive, and proportional
taxes
Equity and Efficiency
• A tax that rises more than in proportion to income,
so that high-income taxpayers pay a larger
percentage of their income than low-income
taxpayers, is a progressive tax.
• A tax that rises less than in proportion to income,
so that high-income taxpayers pay a smaller
percentage of their income than low-income
taxpayers, is a regressive tax.
• A taxes that rises in proportion to income, so that
all taxpayers pay the same percentage of their
income, is a proportional tax.
The Effect of Taxes
• The effect on total
surplus
Price
S
• Price elasticity and tax
incidence
• Who ultimately pays the
tax (the tax incidence)
depends on the price
elasticity of demand and
supply in the market.
DWL
CS
P
PS
D
Qt
Q
Q
Taxes and Total Surplus
• A tax on sellers will shift the supply curve to the
left.
• A tax on buyers will shift the demand curve to the
left, which leads to
• In either case, the tax leads to;
•
•
•
•
a decrease in quantity
an increase in the price paid by consumers.
a decrease in the price received by sellers
a “wedge” between the price consumers pay and
the price producers receive (equal to the amount
of the tax)
Elasticity and Tax Incidence
Tax incidence: the measure of who really pays a tax
• If the demand curve is relatively inelastic and the
supply curve is relatively elastic, the buyers will
pay the larger share of the excise tax.
• If the demand curve is relatively elastic and the
supply curve is relatively inelastic, the sellers will
pay the larger share of the excise tax.
The Benefits and Costs of Taxation
• Benefits (Revenue)
• Costs
Figure 50.5 The Supply and Demand for Hotel Rooms in Potterville
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 50.6 An Excise Tax Imposed on Hotel Owners
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 50.7 An Excise Tax Imposed on Hotel Guests
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 50.8 An Excise Tax Paid Mainly by Consumers
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 50.9 An Excise Tax Paid Mainly by Producers
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 50.10 The Revenue from an Excise Tax
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 50.11 A Tax Reduces Consumer and Producer Surplus
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Deadweight Loss:
losses associated
with quantities of
output that are
great than or less
than the efficient
level.
Figure 50.12 The Deadweight Loss of a Tax
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers