Chapter 8 Reflection

1. How important do you think the concept of a deadweight loss to taxation is?  Why or why not?
2. Should politicians and other taxing authorities consider DWL when making their decisions?

The concept of a deadweight loss to taxation is very important.  As the text explains, the welfare of both consumers and producers falls because when a tax is imposed because buyers buy less, as the good becomes more expensive and producers sell less as it becomes more expensive to produce the good.  These acts combined reduce total surplus.  Furthermore, it not only reduces total surplus, but does so at the expense of superseding the total revenue raised for the government.  I think it is extremely important to take this into consideration when voting for excise tax increases because if you only operate from the perspective that the tax gains are beneficial in some way (federally or locally) it wouldn't be a well-rounded decision on the individual level.  One may not realize the adverse effects it has on their own personal economic welfare.

Politicians should absolutely consider the deadweight tax loss when making their decisions.  Although initially tax revenue increases, will begin to decrease if the tax becomes too large.  I enjoyed learning why this is because without doing so logic may lead you to believe that the larger the tax, the larger the tax revenue, but as the text explains this is not the case.  Since the DWL of a tax is the area of a triangle computed by the square of its size, the DWL rises exponentially is response to the size of the tax.  An overzealous politician or one that is more concerned with equality than efficiency may choose to implement a tax increase that ultimately compromises the economic welfare of society as a whole.