What Are the Three Costs of Taxation? What Is the Deadweight

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The Answer is The costs of taxation to society include the direct cost to taxpayers of the revenue they pay to government. It also includes the loss of consumer and producer surplus caused by the tax. Finally, it includes the cost of administering the tax codes. A tax raises the equilibrium price and reduces the equilibrium quantity. The higher price to consumer reduces the consumer surplus by more than the amount transferred to government. The lower price received by producers reduces producer surplus by more than the amount of revenue transferred to the government. The excess is called the deadweight loss. It arises because a misallocation of resources was caused by a deviation from supply/demand equilibrium.

What Are the Three Costs of Taxation? What Is the Deadweight

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