deadweight loss presentation by grp 3

8/12/2019 Deadweight Loss Presentation by Grp 3

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Deadweight loss of taxation

Presented by Group 3


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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.


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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


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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


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I

Price

0 QuantityDemand

Supply

Size of tax

When supply isrelatively inelastic,the deadweight lossof a tax is small.

Inelastic Supply


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Mumbai- Delhi

Flight base fare Rs 5,110

Flight taxes Rs 401

Price + tax ( price paid by fliers) Rs 5511

Supply= inelastic


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Price

0 QuantityDemand

SupplySizeoftax

When supply is relativelyelastic, the deadweightloss of a tax is large.

Elastic supply


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Inelastic demand

Demand

SupplyPrice

0 Quantity

Size of taxWhen demand isrelatively inelastic,the deadweight lossof a tax is small.

Inelastic Demand


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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.


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Elastic demand

Price

0 Quantity

Sizeoftax Demand

Supply

When demand is relativelyelastic, the deadweightloss of a tax is large.

Elastic Demand


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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.


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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


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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


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Tax revenue

Demand

Supply

Quantity

0

Price

Q1

Deadweightloss

PB

Q2

PS

Size of tax is small


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Tax revenue

Quantity

0

Price

PB

Q2

PS

Supply

Demand

Q1

Deadweightloss

Size of tax is medium


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Tax

revenue

Demand

Supply

Quantity

0

Price

Q1

PB

Q2

PS

Deadweightloss

Size of Tax is large


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Deadweight vs tax sizeDeadweight VS Tax size


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Size of tax is small

Tax revenue vs tax size


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deadweight loss presentation by grp 3

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