Public Economics Lectures Part 1: Introduction

Effi ciency Cost: Marshallian Surplus
3. In terms of change in government revenue
Observe that with an initial tax rate of τ,
EB = 1 2
η S
η D
η S
− η D
pQ( τ p )2
Marginal excess burden (to a first-order approximation) is:
∂EB
∂τ = η S η D
η S
− η D
Q τ p = η Q Q τ p
First-order approx includes only loss in govt revenue due to behavioral
response
Rectangle in the Harberger trapezoid, proportional to τ
Does not include the second-order term (proportional to τ 2 )
Public Economics Lectures () Part 3: Effi ciency 14 / 105