Module
Micro: 14
Econ: 50
Efficiency and
Deadweight Loss
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The meaning and importance of total
surplus and how it can be used to
illustrate efficiency in markets
• How taxes affect total surplus and can
create deadweight loss
Consumer Surplus, Producer
Surplus, And Efficiency
• Gains from trade
• The efficiency of
markets
• Equity and Efficiency
Gains from Trade
• Any time a consumer makes a purchase from a
producer, a trade has been made and both
parties expect to gain.
• Gains from trade are represented by consumer
and producer surplus.
• At the market equilibrium price and quantity, total
surplus is the sum of the CS and PS triangles.
The Efficiency of Markets
• No reallocation of consumption among consumers
could increase consumer surplus
• No reallocation of sales among producers could
increase producer surplus
• No change in the quantity traded could increase
total surplus
Equity and Efficiency
• Efficiency is not society’s only concern. We are
also concerned with equity.
• What is considered “fair” or “equitable” depends
on many factors.
• Often equity and efficiency are at the root of the
debate surrounding taxes.
• Progressive, regressive, and proportional
taxes
The Effect of Taxes
Price
• The effect on total
surplus
• Price elasticity and tax
incidence
S
DWL
CS
P
PS
D
Qt
Q
Q
Taxes and Total Surplus
• A tax on sellers will shift the supply curve to the
left.
• A tax on buyers will shift the demand curve to the
left, which leads to
• In either case, the tax leads to;
•
•
•
•
a decrease in quantity
an increase in the price paid by consumers.
a decrease in the price received by sellers
a “wedge” between the price consumers pay and
the price producers receive (equal to the amount
of the tax)
Elasticity and Tax Incidence
Tax incidence: the measure of who really pays a tax
• If the demand curve is relatively inelastic and the
supply curve is relatively elastic, the buyers will
pay the larger share of the excise tax.
• If the demand curve is relatively elastic and the
supply curve is relatively inelastic, the sellers will
pay the larger share of the excise tax.
The Benefits and Costs of Taxation
• Benefits (Revenue)
• Costs