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Taxes are often a source of heated political debate. In 1776, the anger of the American colonies over British taxes sparked the American Revolution. More than two centuries later Ronald Reagan was elected president on a platform of large cuts in personal income taxes and during his eight years in the White House, the top tax rate on income fell from 70 percent to 28 percent. In 1992 Bill Clinton was elected in part because incumbent Georgr Bush had broken his 1988 campaign promise Read my lips no new taxes. At least in this regard the younger George Bush did not follow in his father’s footsteps. As a candidate he promised a tax cut and as president he made sure to deliver. His critics however   say he cut taxes too much depriving the government of revenue needed for vital public   purposes. Certainly no one would deny that some level of taxation is necessary. As Cliver Wendell Holmes Jr. once said. Taxes are what we pay for civilized society. Because taxati...

This chapter introduced the basic tools of welfare economics consumer and producer surplus and used them to evaluate the efficiency of free markets. We showed that the forces of supply and demand allocate resources efficiency. That is even though each buyer and seller in a market is concerned only about his or her own welfare they are together led by an invisible hand to an equilibrium that maximizes the total benefits to buyers and sellers.  A word of warning is in order. To conclude that markets are efficient we made several assumptions about how markets work. When these assumptions do not hold our conclusion that the market equilibrium is efficient may no longer be true. As we close this chapter let,s consider briefly two of the most important of these assumptions. First our analysis assumed that markets are perfectly competitive. In the world however competition is sometimes far perfect. In some markets a single buyer or seller (or a small group of them) may ...

Consumer and producer surplus when a market reaches the equilibrium pf supply and demand. Recall that consumer surplus equals the area above the price and under the demand curve and producer surplus equals the area below the price and above the supply curve. Thus the total area between the supply and demand curves up to the point of equilibrium represents the total surplus in this market.   Equilibrium allocation of resources? Does it maximize total surplus? To answer these question keep in mind that when a market is in equilibrium the price determines which buyers and sellers participate in the market. Those buyers who value the good more than the price represented by the segment   AE on the demand curve choose to buy the good buyers who value it less than the price (represented by the segment EB) do not. Similarly those sellers whose costs are less than price (represented by the segment CE on the supply curve) choose to produce and sell the good sellers who...

To evaluate market outcomes we introduce into our analysis a new hypothetical character called the benevolent social planner. The benevolent social planner is an all-knowing all-powerful well-intentioned dictator. The planner wants to maximize the economic well-being of everyone in society. What do you suppose this planner should do? Should he just leave buyers and sellers at the equilibrium that they reach naturally on their own? Or can he increase economic well-being by altering the market outcome is some way? To answer this question the planner must first decide how to measure the economic well-being of a society. One possible measure is the sum of consumer and producer surplus which we call total surplus. Consumer surplus is the benefit that buyers receive from participating In a market and producer surplus is the benefit that sellers receive. It is therefore natural   to use total surplus as a measuer of society’s economic well-being. Total surplus in a mark...

You will not be surprised tp hear that sellers always want to receive a higher price for the goods they sell. But how much does sellers well-being rise in response to a higher price? The concept of producer surplus offers a precise answer to this question. A typical upword-sloping supply curve that would arise in a market with many sellers. Although this supply curve differs in shape from the previous we measure producer surplus in the same way. Producer surplus in the area below the price and above the supply curve. In the price is and producer surplus is the area of triangle. What happens when the price rises from to producer surplus now equals area ADF. This increase in producer surplus has two parts. First those sellers who were already selling of the good at the lower price are better off because they now get more what they sell. The increase in producer surplus for existing sellers equals the area of the rectangle BCED. Second some new sellers enter the mar...