Mankiw discussed how taxes affect welfare. Taxation leads to a shrinkage in the market, or deadweight loss from a lower incentive to participate in a market. The total surplus therefore decreases which means a loss in potential surplus (this accurately called a"deadweight"). The government gains revenue by T (size of tax) * Q ( quantity sold) but not at an efficient ratio to the loss of buyers and sellers. Elasticity of the supply and demand curve affects the size of the deadweight loss.
I thought this chapter was easy to understand and I liked the size of the explanations. It didn't ramble on like last chapters ( which I think I am starting to understand better from this chapter emphasizing key pints like how the demand curve shows consumer willingness, supply curve shows producer willingness, how to find total consumer surplus on a graph, etc)
Some things I don't understand are the following:
1.) The book said welfare determines how high the price of civilized society can be. What exactly does this mean?
2.) Taxation can still be good, right? Even though there is a deadweight loss the trade off is better roads, police, etc? Or is there a better alternative to increasing the standard of living?
3.) I would like to talk about elasticity a bit more. It's one of the harder concepts for me.
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