deadweight loss presentation by grp 3
TRANSCRIPT
-
8/12/2019 Deadweight Loss Presentation by Grp 3
1/19
Deadweight loss of taxation
Presented by Group 3
-
8/12/2019 Deadweight Loss Presentation by Grp 3
2/19
Definition
A loss of economic well-being imposed by a tax. Taxes lower the value of transactions to both buyers
sellers, in that, to some extent, the buyer pays more
product and the supplier receives less.
-
8/12/2019 Deadweight Loss Presentation by Grp 3
3/19
Example of deadweight lossExample
10% Entertainment duty o
tickets priced between Rs.
from January 16, 2013.
P
{330
315
300
Example
When subsidy is provided by government ,thetotal cost of subsidy exceeds the benefits enjoyed
by the consumers and sellers.
3 4
Seller receives
Equilibrium
Buyer paysPp
Pc
E
S1
S
D
P
Q
Pp= Price producer receives
Pc=Price consumer pays
-
8/12/2019 Deadweight Loss Presentation by Grp 3
4/19
What determines whether the deadweight loss from
large or small?
The magnitude of the deadweight loss depends on how mquantity supplied and quantity demanded respond to chaprice.
That, in turn, depends on the price elasticity of supply and
The greater the elasticity of demand and supply:
the larger will be the decline in equilibrium quantity and,
the greater the deadweight loss of a tax.
Determinants of deadweight loss
-
8/12/2019 Deadweight Loss Presentation by Grp 3
5/19
I
Price
0 QuantityDemand
Supply
Size of tax
When supply isrelatively inelastic,the deadweight lossof a tax is small.
Inelastic Supply
-
8/12/2019 Deadweight Loss Presentation by Grp 3
6/19
Mumbai- Delhi
Flight base fare Rs 5,110
Flight taxes Rs 401
Price + tax ( price paid by fliers) Rs 5511
Supply= inelastic
-
8/12/2019 Deadweight Loss Presentation by Grp 3
7/19
Price
0 QuantityDemand
SupplySizeoftax
When supply is relativelyelastic, the deadweightloss of a tax is large.
Elastic supply
-
8/12/2019 Deadweight Loss Presentation by Grp 3
8/19
Inelastic demand
Demand
SupplyPrice
0 Quantity
Size of taxWhen demand isrelatively inelastic,the deadweight lossof a tax is small.
Inelastic Demand
-
8/12/2019 Deadweight Loss Presentation by Grp 3
9/19
Examples of inelastic demand
The government may choose to levy an excise tax on tobacco products to deal with the
of secondhand smoke.
This would raise the price of the tobacco products, driving a wedge between the price t
the revenue that sellers receive.
However, because this particular good is addictive and thus subject to habitual consump
relatively inelastic.
In other words, demand does not decrease much when the price increases.
-
8/12/2019 Deadweight Loss Presentation by Grp 3
10/19
Elastic demand
Price
0 Quantity
Sizeoftax Demand
Supply
When demand is relativelyelastic, the deadweightloss of a tax is large.
Elastic Demand
-
8/12/2019 Deadweight Loss Presentation by Grp 3
11/19
Elastic demandExample of Elastic Demand
Greater deadweight in elastic demandExample:
Suppose Rs1000 tax is levied on used cars and the no. of
traded falls from 750 to 500. The imposition of the tax redu
units traded by 250 units.
The loss of the mutual benefit that would have been derivtax not eliminated 250 units of exchange imposes a cost o
buyers and sellers.
The cost is deadweight loss of the tax.
-
8/12/2019 Deadweight Loss Presentation by Grp 3
12/19
EXAMPLE OF ELASTIC DEMAND
Clothing has elastic demand. True, people have to wear clothes, many choices of what kind of clothing, and how much to spend.
Stores offered sales, and as a result clothing prices dropped to m
demand. Small stores that couldn't offer huge discounts went ou
During the Great Recession, they were replaced by second-hand
offered quality used clothing at steeply discounted prices
-
8/12/2019 Deadweight Loss Presentation by Grp 3
13/19
Dead weight loss and tax revenue
Tax revenue is the income that is gained by governments through
taxation.
Tax revenue varies with the proportion of the tax as a percentage of
the product price.
Moderate tax rate= most tax revenue
Tax rate small= less tax revenue. tax rate high= less tax revenue
-
8/12/2019 Deadweight Loss Presentation by Grp 3
14/19
Tax revenue
Demand
Supply
Quantity
0
Price
Q1
Deadweightloss
PB
Q2
PS
Size of tax is small
-
8/12/2019 Deadweight Loss Presentation by Grp 3
15/19
Tax revenue
Quantity
0
Price
PB
Q2
PS
Supply
Demand
Q1
Deadweightloss
Size of tax is medium
-
8/12/2019 Deadweight Loss Presentation by Grp 3
16/19
Tax
revenue
Demand
Supply
Quantity
0
Price
Q1
PB
Q2
PS
Deadweightloss
Size of Tax is large
-
8/12/2019 Deadweight Loss Presentation by Grp 3
17/19
Deadweight vs tax sizeDeadweight VS Tax size
-
8/12/2019 Deadweight Loss Presentation by Grp 3
18/19
Size of tax is small
Tax revenue vs tax size
-
8/12/2019 Deadweight Loss Presentation by Grp 3
19/19