Chapter 8

The general topic of chapter 8 was taxation and the negative impact it has on a market. The government needs revenue to do its job and so taxes are necessary. However taxes still cause market distortion that can and needs to be minimized. In addition to the revenue that the government takes and the total surplus shrunk, which in turn decreases market efficiency, dead-weight loss is created which represents all of the transactions that would have occurred if not for the tax. The revenue lost from dead-weight loss is not gained by the government or by buyers or sellers, it is simply lost. That is why it is important to be careful about which commodities to tax as a policymaker. It generally does not matter if a tax is levied on the demand or supply side since it will end up being shared by both but it does matter which markets are taxed. Whoever is more inelastic, demand or supply, will continue to bear the majority of the burden of the tax so choosing a market in which many small businesses have inelastic with their supply will cause them to go shut down while choosing a market where people will continuously buy the product such as health care will just hurt the common people. However inelasticity also causes the least amount of market distortion and creates the smallest deadweight loss. That is why policymakers must evaluate which market can survive a tax without hurting the public too much and which market is close to perfectly inelastic, if one exists.