Taxation and Efficiency - Public Finance - Lecture Handout, Exercises of Finance

Download Taxation and Efficiency - Public Finance - Lecture Handout and more Exercises Finance in PDF only on Docsity! Taxation and Efficiency I. Excess burden a. Loss of welfare beyond the tax revenues b. Results from distortion of economic decisions resulting from the tax II. Measuring Excess Burden a. Tax on barley rotate budget constraint i. Prior to tax consumer utility was maximized at E1 at consumption levels of C1 and B1 ii. With tax, consumer can no longer afford C1 and B1 docsity.com b. With tax consumer utility is maximized at E2 with consumption of C2 and B2 i. Consumer has moved from utility level i to ii c. Measure the equivalent variation i. Reduction in income that would place the consumer on the same indifference curve as the tax ii. Tax income equivalent of the tax moves the consumer to E3 and consumption level C3 and B3 iii. Excess burden is distance E2N docsity.com