Tuesday, March 17, 2009

As the Professor . . .

. . . handed out the midterm, she explained that on this test, and the final, each question will be worth four points. If a student is able to answer a question in a remarkably educated manner - she would give that student six points.

When I got the midterm back, I found that I either got zero points, or six points on all the questions. I looked at the questions that she gave six points to, and realized that she gave me six points on the questions I answered "with a smile." For example, when asked if bread is a non-rival good in consumption, I stated that it wasn't. "If there's a loaf of bread between you and me, each bite I consume is a bite that you can't. And you don't want the bread I didn't eat. I've licked it all."

So for the final, I did my damnedest to answer every question with that same tone.

One I was particularly proud of on yesterday's final is as follows.

In words and graph, explain Excess Burden.

Excess Burden (aka Deadweight Loss) is a term used to refer to those displaced due to the implementation or increase of a tax. The Deadweight Loss can give us insight into the equity of a tax and help determine if the tax if efficient in its structure.

To better illustrate this, we'll use the Window Tax of Great Britain as an example. (Note: This was never brought up in class. I vaguely remember reading of such a thing in some dumb book of trivia.) The tax was imposed on each window in a household. Those families too poor to absorb the tax were forced to forgo windows.

Below we have a typical supply and demand curve. Price is set at equilibrium (where P1 and Q1 intersect).

The tax imposed tax now increases the price of the good to P2, causing a leftward shift in demand from Q1 to Q2 - a product of the increased cost.

The Excess Burden of the tax are those people who board up windows to avert the tax. They, the deadweight loss, are represented in the triangle now formed between Q1 to Q2.

And that is Excess Burden.

(If this doesn't get me six points, I quit.)

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