Math Is Hard

I have a background (and interest) in statistics and econometrics.  I know what you’re thinking but it’s not contagious so relax.  No need to stampede for the doors or disinfect your computer.  Imagined visions of sweaty pallid socially awkward losers dithering away with calculators and hunched over charts is terrifying but I won’t go far down the rabbit hole.

Homer Simpson, pictured above, demonstrates that not all people who are skilled in math are underfed wimps. We applaud Mr. Simpson for expanding the realm of mathematics to the "drunken lout" sector of the economy..

Like it or not, math is the tool of choice if you’re going to talk about little slips of green paper folks have come to associate with wealth.  More to the point, you can’t look at proposed new taxes or regulations and say “it’ll be just like now except…”.  It won’t.  Taxes and other effects are anticipated far upstream in time and you can easily wind up with a different future which simply doesn’t have what we take for granted in our current conditions.  It’s not easy to explain but some things will simply not exist (or exist less) because incentives/constraints like taxes (and other things) change their creation.  Neither the government nor anyone else can take what hasn’t been produced…no matter how hard they try.

Alas it’s not a simple concept and it makes me sound like a pinhead when I try to discuss it.  (I usually sound like a bunker dwelling paranoid lunatic too but I’m ok with that, really.)

Recently I stumbled across a neat little explanation of the Deadweight Loss caused by taxes.  If I’d tried to explain it I’d have gone on for hours and created a crater in the reader’s brain.  This guy wisely wrote all you need to know in 170 words.  Such a nice clean approachable explanation deserves a medal.  All I can do is shamelessly link and say…”yeah that’s what I’ve been trying to say.”

Imagine that you want to go to New York on a trip.  You value the trip at $50 and a bus ticket costs $40.  Do you take the trip?

A. Yes.  The value ($50) of the trip exceeds the cost of the ticket ($40) so you travel to New York.

How much consumer surplus (net value) do you get from the trip?

A. $10=$50-$40.

The government taxes bus tickets which raises the price of a bus ticket to $60.  Do you take the trip?

A. No. The value of the trip is now less than the price of the ticket.

What happened to the $10 consumer surplus which you used to get when there was no tax?

A. It’s gone since no trip takes place.

Did the government get any tax revenue from you?

A. No.

Conclusion: Deadweight loss is the value of the trips (trades) which do not happen because of the tax.

(Emphasis added by your’s truly.)

There’s more at Marginal Revolution. I encourage you to check it out.

About Adaptive Curmudgeon

I will neither confirm nor deny that I actually exist.
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1 Response to Math Is Hard

  1. Doctor Mingo says:

    Elegantly simple explanation of deadweight loss. Bravo.

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