Chapter 8: Application: The Costs of Taxation

Chapter 8 is all about the cost of having the government place a tax on a good and the effect it can create. As learned in Chapter 7, the total surplus of a good is the combined total of the consumer and producer surplus. However, when a tax is levied on a good, the total surplus diminishes, producing a tax revenue and deadweight loss. Deadweight loss is the fall in total surplus from a market distortion, such as a tax. Deadweight loss and changes in welfare go hand-in-hand with one of the ten principles of economics; people respond to initiatives. When comparing this idea to the world today, it still holds true. It is clearly visible during presidential campaigns since the citizens are always concerned of having to pay tax (example: labor tax). With a tax being placed, less sellers are willing to produce and less buyers are willing to demand the good. Therefore, many economists continue the debate whether or not deadweight loss is beneficial to the society. It is also important to know that the more elastic the curve is (supply or demand), the greater the amount to deadweight loss. Another important thing to mention about deadweight loss is that it creates a laffer curve. A laffer curve shows how the tax revenue is impacted through time. Also, the bigger the tax, the more deadweight loss produced.
Overall I would give the Chapter a rating of two since it was an easy read and it is now connecting what we learned to a bigger idea and the government's role in the economy. However the introduction of a supply-slide economics got me confused and I would like to understand more about it.