Special Topic 1. Government Spending and Taxation.


Dead weight loss: Dead weight loss is the decrease in the total surplus in an economy due to an inefficient level of production. As taxes are the burden that is imposed by the government on consumption of goods and services, the tax will reduce the efficiency. By imposing a tax, efficiency of a resource falls because taxes impose a burden on the society in the form of compliance costs and the deadweight losses. This reduces the consumer and producer surplus in the economy leading to a reduction in the efficiency of resources. The cost of the additional tax revenue will be greater than the revenue transferred to the government. Taxes impose an additional burden on the economy as they eliminate productive exchanges. Deadweight loss occurs as the burden is imposed on the tax revenue transferred to the government. Research indicates that these deadweight losses will add between 9% to 16% to the cost of taxation. That is a $1 tax paid will impose between $1.20 to $1.30 cost on the economy.

This statement is actually false. Yes many economists would agree that government should provide these goods like health care, education etc. But the problematic part is that the claim that government can provide these for free of cost. Nothing is free of cost in this World. But since these goods are considered as merit goods hence government can produce subsidies for these goods for the benefit of the society.

a. In the market place the usual method of rationing goods is the pricing. The usual process of corresponding incentivisation is as follows - whenever some good's price rises it is beneficial for the holder of that goods to sell it and whenever some good's price falls it is beneficial for someone who demands it to buy that good. b. Grades rationing in Economics class or usually in any course happens on the basis of performance in the examination. Usually more one put labor to grasp the material and syllabus more she score in examination. Now if rationing happen based on teacher's preference not depending on students' effort then there will not be any incentive for students to put hard work to grasp or complete the syllabus rather there would be incentive to become closer to the teacher.

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