Professional Documents
Culture Documents
Princ Ch08 Presentation
Princ Ch08 Presentation
PRINCIPLES OF
ECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint® Slides
by Ron Cronovich
PE
PS D
Q
QT QE
CS = A + B + C
PS = D + E + F A
Tax revenue = 0 S
B C
Total surplus PE
= CS + PS D E
=A+B+C D
F
+D+E+F
Q
QT QE
Q
QT QE
Size
of tax
D
Q
S
The more elastic
is supply, Size
the larger is of tax
the DWL.
D
Q
D
Q
19
A C T I V E L E A R N I N G 2:
Answers
A. Rice Krispies or sunscreen
From Chapter 5:
Rice Krispies has many more close substitutes
than sunscreen, so demand for Rice Krispies is
more price-elastic than demand for sunscreen.
So, a tax on Rice Krispies would cause a larger
DWL than a tax on sunscreen.
20
A C T I V E L E A R N I N G 2:
Answers
B. Hotel rooms in the short run or long run
From Chapter 5:
The price elasticities of demand and supply
for hotel rooms are larger in the long run than
in the short run.
So, a tax on hotel rooms would cause a larger
DWL in the long run than in the short run.
21
A C T I V E L E A R N I N G 2:
Answers
C. Groceries or meals at fancy restaurants
From Chapter 5:
Groceries are more of a necessity and therefore
less price-elastic than meals at fancy restaurants.
So, a tax on restaurant meals would cause a
larger DWL than a tax on groceries.
22
A C T I V E L E A R N I N G 3:
Discussion question
▪ The government must raise tax revenue to pay
for schools, police, etc. To do this, it can either
tax groceries or meals at fancy restaurants.
▪ Which should it tax?
23
How Big Should the Government Be?
▪ A bigger government provides more services,
but requires higher taxes, which cause DWL.
▪ The larger the DWL from taxation,
the greater the argument for smaller government.
▪ The tax on labor income is especially important;
it’s the biggest source of govt revenue.
▪ For many workers, the marginal tax rate (the tax
on the last dollar of earnings) is almost 50%.
▪ How big is the DWL from this tax?
It depends on elasticity….
Q
Q2 Q1
Q
Q3 Q1
Q
Q2 Q1
PB
PB
S
When the 3T 2T
tax is larger,
increasing it D
causes tax PS
revenue to fall. PS
Q
Q3 Q2
Tax size