Chapter 8 Reflections- Application: The Costs of Taxation

1. How important do you think the concept of a deadweight loss to taxation is?  Why or why not?

I think deadweight loss is very important when considering taxation policies. When levying a tax one has to take into account how to determine the equilibrium between collecting the greatest amount of revenue without driving down demand for the product or service being taxed. If taxes are too high people will try to avoid buying that product or service or avoid paying the tax illegally. If the tax is too low then you can't generate the necessary revenue for governmental services. 

2. Should politicians and other taxing authorities consider DWL when making their decisions?

Yes, politicians and other taxing authorities consider deadweight loss when making their decisions. Those who have the power to increase or decrease taxes must take into account DWL because by levying taxes they impact the market. Increased taxes discourages people from buying more or buying cheaper-made goods. This in turn discourages producers to produce less or products of lesser quality. Just remember, when there is an increase in taxes this doesn't necessarily mean that there is more tax revenue for government spending. 

Remember: deadweight loss is an excess burden, a loss of economic efficiency or the fall in total surplus that results from a market distortion, ie: a tax.