Chp 8

Chapter 8 introduced the concept of dead weight loss by using, once again, taxation to visually show what it is. Dead weight loss is the fall in total surplus that results from a market distortion such as tax. As usual the graphs made the concept a lot easier to understand. I really like how the author also creates scenarios that are easy to relate to and apply the concepts in the chapter. Such as Joe and Jane's situation. Unfortunately at the end, because of the outrageous (exaggerating of course) taxation, Joe is left without an income and Jane is left with a dirtier house. This is a perfect example of how taxes cause dead weight losses because they prevent buyers and sellers from realizing some of the gains from trade. Before the tax was imposed the total surplus was 40 dollars, 20 to Joe and 20 to Jane, but after the taxation they each get nothing and to add on top of that the losses of Joe and Jane from the tax exceed the revenue raised by the government, The size of the dead weight loss also depends on the elasticity of supply and/or demand. The more elastic the curve is the greater the dead weight loss. Except, in the real world, no one can agree about the size of relevant elasticities; or other things such as which side of the laffer curve a country is on which seems pretty important since countries such as Sweden went a while with really high tax rates that lowered revenue.