Chapter 8

Chapter 8 directly adds to the concepts brought up in Chapter 7 by delving into a deeper analysis of consumer and producer surplus. Taxes cause a buyer to buy less and a consumer to produce less. They reduce welfare for both buyers and sellers of a good. If a government enforces a tax on a market it creates a deadweight loss. The government takes a large portion of the total surplus, leaving the consumer surplus and producer surplus much smaller than it was. However, when the government takes part of the total surplus, some of the surplus disappears. This surplus that disappears is called deadweight loss. Due to the loss in surplus, the market becomes inefficient.  One question I have is where does the deadweight surplus go? Does it just stay in the buyer's pockets until it is used on another purchase? Also, the size of deadweight loss grows faster than the government's tax as the tax is increased. This is due to the deadweight loss being a triangle and the tax being a square. Therefore the smaller the tax, the smaller the deadweight loss. However, if a tax is too large, it becomes  too taxing on a market and therefore tax revenue begins to decrease. The chapter then shifts to talk about how the price elasticity of supply and demand control the size of dead weight loss. The larger the elasticity, the greater the deadweight loss. Greater elasticity means that taxes distort the market more.