Ch 8 the cost of taxation

when demand is elastic the deadweight loss of a tax is ...

large

the market experiences a deadweight loss of $80 just calculate the area of the deadweight loss, the triangle from A to B to Equilibrium

As a result of the tax,

When a tax is levied on buyers, the A) supply curve shifts upward by the amount of the tax. B) tax creates a wedge between the price buyers pay and the price sellers receive. C) tax has no effect on the well-being of sellers. D) buyers bear the entire burden of the tax.

B

taxes on labor encourage which of the following? A) labor demands to be more inelastic B) mothers to stay at home rather than work in the labor force C) workers to work overtime D) fathers to take on second jobs

B

scenario 8-1 Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. If Erin pays Ernesto $90 to clean her house, Erin's consumer surplus is

CS = WP - AP CS = $100 - $70 = $10

consumer surplus (CS) =

CS = WP - AP consumer surplus = (amount buyers are willing to pay for the good) - (amount they actually pay for it)

DWL = (tax) * (quantity) * 0.5 DWL = ($15)(200)(0.5) = $1,500 A)$1,500

For widgets, the supply curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. the tax reduces the equilibrium quantity in the market by 200 units. The deadweight loss from the tax is A)$3000 B)$1,500 C)$107.50 D)$92.50

as a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. because a tax reduces the size of the market, however, tax revenue does not continually increase.

It first rises with the size of the tax, but if the tax gets large enough, tax revenue starts to fall.

D1

Suppose the government imposes a $1 tax in each of the four markets represented by demand curves D1, D2, D3, and D4. The deadweight will be the smallest in the market represented by A) D1 B) D2 C) D3 D) D4

if T represents the size of a tax on a good and Q represents the quantity of the good that is sold, total tax revenue received by government can be expressed as

T * Q

a tax affects

buyers, sellers, and the government

the decrease in total surplus that results from a market distortion, such as a tax, is called

deadweight loss

from small to a large tax revenue ...

increases then decreases

a tax on a good reduces the welfare of a buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus --the sum of consumer surplus, producer surplus, and tax revenue--

is called the deadweight loss of the tax

the social security tax is a tax on ...

labor

when supply is inelastic deadweight loss of a tax is ...

relatively small

what does a large tax's deadweight loss look like?

this

what does a medium tax's deadweight loss look like?

this

what does a small tax's deadweight loss look like?

this

the government's benefit from a tax can be measured by

tax revenue

from small to a large tax does deadwight loss continually increase?

yes

Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. If Ernesto cleans Erin's house for $90, Ernesto's producer surplus is ...

yes graph: Producer surplus = (market price - minimum price) * (quantity) * 0.5 no graph: Producer surplus = (market price - minimum price) * (quantity) PS = (MP - minP) * (Q) PS = (90 - 70) * (1) = $20

deadweight loss (DL) =

DL = TS - TSWT deadweight loss = (total surplus without tax) - (total surplus with tax) area C+E

tax revenue (TR) =

TR = T * X Tax revenue = (size of tax) * (quantity sold)

TR = (maxP - minP) * (Q) TR = (9 - 4) * (1) = $5 C) $5

The amount of tax revenue received by the government is A) $1 B) $10 C) $5 D) $6

how does tax affect welfare?

a tax on a good reduces consumer surplus (by the area B+C) and producer surplus (by area D+E). Because the fall in producer and consumer surplus exceeds tax revenue (area B+D), the tax is said to impose a deadweight loss (area C+E)

when supply is relatively elastic the deadweight loss of a tax is ...

large

taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus. Because the elasticities of supply and demand measure how much market participants respond to market conditions,

larger elasticities imply larger deadweight losses.

when the demand is inelastic the deadweight loss is ...

small

A

suppose the 20th unit of the good were sold by a seller to a buyer. Which of the following statements is correct? A) for the 20th unit, the difference between the buyer's value and the sellers cost is less than the tax per unit. B) For the 20th unit, the difference between the buyer's value and the seller's cost is greater than the tax per unit. C) For the 20th unit, the difference between the buyer's value and the seller's cost is equal to the tax per unit. D) It makes sense for the buyer to buy and the seller to sell the 20th unit, with or without the tax in place.

the ultimate source of deadweight losses

taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade

define consumer surplus

the benefit received by buyers in a market

deadweight loss

the fall in total surplus that results from a market distortion

A) Graph a

which graph correctly illustrates the relationship between the size of a tax and the size of the deadweight loss associated with the tax A) Graph a B) Graph b C) Graph c D) Graph d