Chapter 8 Journal

Chapter 8 elaborated more about taxes and applying them which were initially introduced in Chapter 6. This chapter went more in depth into taxes and how it really affects the market, buyers, and sellers. A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus is called the deadweight loss of the tax. Taxes have deadweight losses because they cause buyers to buy less and sellers to produce less, and these shrink the size of the market below the level that maximizes total surplus. Because the elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger deadweight losses. As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if a tax gets too large, tax revenue starts to fall. The examples and case studies used in the book like cleaning houses, deadweight loss debate, and the laffer curve and supply-side economics are all impacted by the deadweight losses. Overall, this chapter was pretty easy to read and understand. I would rate this chapter a 1/3 in terms of difficulty. The book provided many examples and graphs to explain the content. I have no questions about this chapter.