Chapter 8 Review

I would rate this chapter a difficulty level of 1.5/3. I chose this difficulty because most of the information is old news and can be inferred from past chapters. However, the only part I had to look at deeper was the relativity of deadweight loss and tax revenue.

In the beginning of the chapter, the book introduces the idea of "deadweight loss". I already understood this because Mr. Waller talked to us about it in class, so this was easy to understand. Something interesting I found about deadweight loss is how relevant it is to me. If there was a raise in taxes for a certain product (Rolex watch)  I want to buy, I probably wouldn't buy it afterwards because of the tax. My money that was meant to be bought from that would be dead weight loss.

Note: Bigger elasticity of supply and demand = bigger DEADWEIGHT LOSS.

Near the end of the chapter (this was the trickier part), the book gave the ratio between deadweight loss, tax size, and tax revenue. It is important to note that deadweight loss is exponential and Tax revenue looks like a negative quadratic equation.  I found myself staring at the graphs more to try and understand why this works, and I found out that it was because of the size of the T x Q rectangle. Also, elasticity plays a huge role in participants who respond to market conditions.

Tax increase = Less incentives = More deadweight loss.