What are basic tools of welfare economics What is the effect

What are basic tools of welfare economics? What is the effect of taxes on market efficiency?

Solution

Basic tools of welfare economics includes the consumer and the producer surplus.Together they measure the total surplus of the society.Society\'s welfare is about the total surplus realised by the society through various transactions.Total surplus is given by the sum of producer and consumer surplus , these two turn out to be the tools for maximising society\'s welfare.

Taxes leads to reduction in the overall welfare to the society as it leads to inefficient outcome.Due to imposition of taxes there is a discrepency between the price paid by the buyer and that recieved by the seller.This difference is the tax amount.However a tax imposition shifts either the demand or supply curve depending upon the fact that on which section of the market tax has been imposed.Thus as a result of this shift the intersection between supply and demand leads to a lower level of market equilibrium and there arises a dead weight loss in the society i.e a part that goes to none in the society.Thus a tax imposition minimises welfare.