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q* No tax CS Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* No tax PS Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market supply p* q* No tax CS PS Deadweight Loss and OwnPrice Elasticities p D(p), S(p) Market demand Market 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。) = S((1- t)r 180。 ) (2) r 180。= r* /(1- t) q* r* r* /(1- t) s s180。 D D 180。 )()( ?? ? qrqr lb)()1( qrrt bb ??bbtqrr?? 1)()()1( qrrt ll ??lltqrr??1)(If we use the inverse demand and supply function, the loans market equilibrium condition: or or If borrowers and lenders to be in different tax, tb ? tl 111 ?lbtt??If tb < tl So if the tax bracket of lenders is greater than the tax bracket of borrowers, the system is a tax on borrowing, but if tl < tb, it is a subsidy. llbbtqrtqrr???? 1)?(1)?()?(11)?( qrttqr llbb ???Equilibrium condition: If tb = tl *? qq ?, If tb≠ tl SKpD ??? )(SKpD ??)2?(Example : food subsidies