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Elasticities and the excess burden

27 一月, 2016 - 14:24

We suggested above that elasticities are important in determining the size of the deadweight loss of a tax. Going back to Figure 5.3, suppose that the demand curve through E_{0} were more elastic (with the same supply curve, for simplicity). The post-tax equilibrium E_{t} would now yield a lower Q_{t} value and a price between P_{t} and P_{0}. The resulting tax revenue raised and the magnitude of the excess burden would differ because of the new elasticity.