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supply p* q* No tax CS PS Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps CS PS The tax reduces both CS and PS Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps CS PS The tax reduces both CS and PS, transfers surplus to government Tax Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps CS PS The tax reduces both CS and PS, transfers surplus to government Tax Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps CS PS The tax reduces both CS and PS, transfers surplus to government Tax Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps CS PS The tax reduces both CS and PS, transfers surplus to government, and lowers total surplus. Tax Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps CS PS Tax Deadweight loss Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps Deadweight loss Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps Deadweight loss falls as market demand bees less own price elastic. Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* $t pb qt ps Deadweight loss falls as market demand bees less own price elastic. Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply ps= p* $t pb qt = q* Deadweight loss falls as market demand bees less own price elastic. When ?D = 0, the tax causes no deadweight loss. Deadweight Loss and OwnPrice Elasticities ?Deadweight loss due to a quantity tax rises as either market demand or market supply bees more ownprice elastic. ?If either ?D = 0 or ?S = 0 then the deadweight loss is zero. Example :The loans market D(r*) = S(r*) (1) D((1- t)r 180。 D D 180。 ) (2) r 180。 Market Equilibrium p a c btb ds ? ? ??p a c dtb db ? ? ??q ad bc bdtb dt ? ? ??The tax paid per unit by the buyer is p p a c dtb d a cb d dtb db ? ? ? ?? ? ?? ? ?* .Quantity Taxes amp。 Market Equilibrium D p a bpb b( ) ? ?S p c dps s( ) .? ?and With the tax, the market equilibrium satisfies p p tb s? ? D p S pb s( ) ( )?and so p p tb s? ? a bp c dpb s? ? ? .and Substituting for pb gives a b p t c dp p a c btb ds s s? ? ? ? ? ? ? ??( ) .Quantity Taxes amp。 Market Equilibrium p D(p), S(p) Market demand Market supply p* q* pb qt ps Tax paid by buyers Tax paid by sellers Quantity Taxes amp。 Market Equilibrium ?Who pays the tax of $t per unit traded? ?The division of the $t between buyers and sellers is the incidence of the tax. Quantity Taxes amp。 Market Equilibrium p D(p), S(p) Market demand Market supply p* q* An sales tax lowers the market demand curve by $t $t Quantity Taxes amp。 Market Equilibrium p D(p), S(p) Market demand Market supply p* q* $t An excise tax raises the mar