Free Market Thinking - Indirect Taxation and Deadweight Welfare Loss

Free market economists are major critics of government intervention in markets. Only if it is fundamentally necessary should governments step in ( if there are substantial third party costs and if the free market is failing to allocate public goods are good examples) and even then, the use of effluent charges is best. Not many students are able to understand why the imposition of an indirect tax is market distorting and why specifically a deadweight welfare loss occurs as a result of the imposition of the indirect tax. This video explains exactly that, comparing free market equilibrium to the new tax equilibrium isolating all surplus, cost and benefits involved, finishing with overall welfare. The conclusion will be that an indirect tax will lead to net loss of social and economic welfare for society thus the key question for governments before making the decision to intervene is to question whether the benefits of intervention in the form of government revenue and potentially solving a prior misallocation of resources outweigh the costs of a loss of welfare. Higher level thinking for your top students. Enjoy