Chapter 13-Taxation and Efficiency Public economics
1 Chapter 13 – Taxation and Efficiency Public Economics
Introduction Are people unaffected by a tax increase if they pay zero in taxes afterwards? No, consumption may have changed in response to the tax increase Bundle consumed is less desirable Excess burden is a loss of welfare above and beyond the tax revenues collected
2 Introduction • Are people unaffected by a tax increase if they pay zero in taxes afterwards? – No, consumption may have changed in response to the tax increase – Bundle consumed is less desirable • Excess burden is a loss of welfare above and beyond the tax revenues collected
Excess Burden defined Two commodities Barley and corn Fixed income Pb and pc are prices of goods No distortions such as externalities imperfect competition, public goods, etc
3 Excess Burden Defined • Two commodities – Barley and corn • Fixed income • Pb and Pc are prices of goods • No distortions such as externalities, imperfect competition, public goods, etc
Excess Burden defined Figure 13. 1 shows the budget constraint (AD), with utility maximized at bundle E1 Ad-valorem tax levied on barley at rate tb raises the price to(1+tb)Pb, and rotates the budget constraint along the x-axis The new budget constraint is AF
4 Excess Burden Defined • Figure 13.1 shows the budget constraint (AD), with utility maximized at bundle E1 . • Ad-valorem tax levied on barley at rate tb raises the price to (1+tb )Pb , and rotates the budget constraint along the x-axis. The new budget constraint is AF
Figure 13.1 A Budget constraint before b CI Budget constraint after barley tax F Ba B Pounds of barley per year
Figure 13.1