Monday, January 2, 2017

It is not a metaphor

A goodie from Henderson:

The Noise-to-Signal Ratio as a Metaphor for Deadweight Loss from Taxes

A basic insight from economics is that prices are signals that reveal the value or scarcity of resources; this helps people use them efficiently. But taxes can be seen as the noise that distorts that signal. The more distorted the signal, the less efficient prices become in allocating resources. As I show in the accompanying graphs, when a per unit tax is placed on a good, the price the sellers receive (that is, the amount they get to keep after they pay the tax to the government) falls while the price the consumers pay rises. This tax "wedge" distorts the market because it causes buyers and sellers to face two different prices for the same item: the buyer pays the price gross of tax while the seller receives a price that is net of tax. The larger this tax wedge, the greater is the distortion. In my metaphor, the greater is the noise. If you are listening to the radio and start hearing noise or static, the signal starts to lose its value. Eventually, the noise overwhelms the signal, and there is no longer a reason to listen since the NSR is so high. The same thing happens with taxes: as the NSR rises, the DWL rises at a similar rate. Thus, the NSR helps illustrate how rising taxes increasingly damage economic efficiency.
It is not a metaphor. The tax is a three color and causes a loop.  What the consumer and producer see is a variable shift between bid/ask. Hence bit error must increase in the currency S&L to cover the shift, and the shift can be a very long loop.  That increased bit error is bell shaped noise when thing run smoothly. Or at least not saddlebacked, but it will increase priceable risk.

In actual fact what is means is that the delivery company often makes inefficient deliveries when taxes get computed, so as to send digits to daddy on time.

Solution? Keep the tax loop down to 2 mayorial election cycles.

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