Econ Ch 8
Terms in this set (35)
In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.
If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax.
Deadweight loss is the reduction in consumer surplus that results from a tax.
When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.
f John values having his hair cut at $20 and Mary's cost of providing the haircut is $10, any tax on haircuts larger than $10 will eliminate the gains from trade and cause a $20 loss of total surplus.
A tax causes a deadweight loss because it eliminates some of the potential gains from trade.
A larger tax always generates more tax revenue.
A larger tax always generates a larger deadweight loss.
If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.
A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.
If a tax is doubled, the deadweight loss from the tax more than doubles.
A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceed the costs to the sellers.
If there is no tax placed on the product in this market, consumer surplus is the area
A + B + E.
If there is no tax placed on the product in this market, producer surplus is the area
C + D + F.
If a tax is placed on the product in this market, consumer surplus is the area
f a tax is placed on the product in this market, producer surplus is the area
If a tax is placed on the product in this market, tax revenue paid by the buyers is the area
f a tax is placed on the product in this market, tax revenue paid by the sellers is the area
If there is no tax placed on the product in this market, total surplus is the area
A + B + C + D + E + F.
If a tax is placed on the product in this market, total surplus is the area
A + B + C + D.
If a tax is placed on the product in this market, deadweight loss is the area
E + F.
The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a
If a tax on a good is doubled, the deadweight loss from the tax
increases by a factor of four.
The reduction of a tax
could increase tax revenue if the tax had been extremely high.
When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has
caused a deadweight loss.
If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.
A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.
A tax will generate a greater deadweight loss if supply and demand are inelastic.
Which of the following is true with regard to the burden of the tax in Exhibit 4?
The sellers pay a larger portion of the tax because supply is more inelastic than demand.
Which of the following would likely cause the greatest deadweight loss?
a tax on cruise line tickets
A tax on gasoline is likely to
cause a greater deadweight loss in the long run when compared to the short run.
Deadweight loss is greatest when
both supply and demand are relatively elastic.
Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a
small deadweight loss and the burden of the tax would fall on the seller of diamonds.
Taxes on labor income tend to encourage
second earners to stay home.
the elderly to retire early.
workers to work fewer hours.
the unscrupulous to enter the underground economy.
all of these answers
When a tax on a good starts small and is gradually increased, tax revenue will
first rise and then fall.
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