Deadweight Losses and the Gains from Trade Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. Harcourt, Inc. items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Deadweight Losses and the Gains from Trade Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade
The Deadweight Loss ■■■ Lost gains from trade Supply B Price =P, Size of tax without tax“"""" ■■■■■ Cost to sellers ■■■ Demand Value to buyers 0 2 Q1 Quantity Reduction in quantity due to the tax H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Deadweight Loss... 0 Quantity Price Demand Supply Q1 PB Price = P1 without tax PS Q2 Size of tax Lost gains from trade Cost to sellers Value to buyers Reduction in quantity due to the tax
Determinants of Deadweight LoSS What determines whether the deadweight loss from a tax is large or small? o The magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price o That, in turn, depends on the price elasticities of supply and demand. H arc Inc. items and derived items c ht o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Determinants of Deadweight Loss What determines whether the deadweight loss from a tax is large or small? uThe magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price. uThat, in turn, depends on the price elasticities of supply and demand
Tax Distortions and Elasticities (a Inelastic Supply Price Supply When supply is relatively inelastic, the deadweight loss of a tax is smal size of tax Demand Quantity 0 H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Tax Distortions and Elasticities... Quantity Price Demand Supply 0 When supply is relatively inelastic, the deadweight loss of a tax is small. (a) Inelastic Supply Size of tax
Tax Distortions and elasticities ■■■ (b Elastic Supply Price When supply is relatively elastic, the deadweight loss of a tax is large Supply Size of tax Demand Quantity 0 H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Tax Distortions and Elasticities... Quantity Price Demand Supply 0 Size of tax When supply is relatively elastic, the deadweight loss of a tax is large. (b) Elastic Supply