Chp. 8: Application: The Costs of Taxation

Chapter 8 is about the effects of taxation in the market. The chapter explains that when a ax is levied on buyers, it causes the demand curve to shift downwards by the size of the tax while if the tax was levied on the sellers, the supply curve shifts upwards by the size of the tax. The end result is that the price paid by buyers increases and the price received by sellers are decreased. In addition, a tax on a good causes the size of the market for the good to decrease. Consumers, producers, and the government receive some type of benefit from taxation; consumers receive consumer surplus, producers receive producer surplus, and the government receives total tax revenue. Welfare without tax would leave the equilibrium at the intersection between the supply and demand curve.