Application: The Costs of Taxation | Chapter 8 - Principles of Microeconomics (9th Edition)

Описание: Chapter 8 of Principles of Microeconomics (9th Edition) by N. Gregory Mankiw applies welfare economics to analyze the costs of taxation. The chapter begins by showing that taxes create a tax wedge between what buyers pay and what sellers receive, shrinking the size of the market and reducing total surplus. Using the concepts of consumer surplus, producer surplus, and government revenue, Mankiw explains how taxes generate deadweight loss—the lost gains from trade that occur when mutually beneficial transactions are discouraged. For instance, a tax on house-cleaning services may prevent deals that would otherwise benefit both buyer and seller, reducing overall welfare without raising revenue. The chapter then explores the determinants of deadweight loss, emphasizing that the greater the elasticities of supply and demand, the larger the behavioral response to taxation and the greater the efficiency loss. Case studies highlight how taxes on goods like labor create political debate: if labor supply is inelastic, deadweight loss is small, but if labor supply is elastic, taxes discourage work, second earners, and even encourage underground economic activity. The chapter also examines how deadweight loss and tax revenue vary with tax size. Small taxes create small losses, but as taxes grow larger, deadweight loss rises disproportionately, while tax revenue eventually declines—a relationship illustrated by the Laffer curve, which suggests that beyond a certain point, higher taxes reduce rather than increase revenue. Historical examples, such as the Reagan tax cuts of the 1980s and later debates on supply-side economics, show how theory influences policy disputes over government size and efficiency. The chapter concludes that while taxes are necessary for funding public goods and redistribution, they impose costs that must be carefully weighed in designing effective fiscal policy.

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