Econ ch 8

Suppose the tax on gasoline is decreased from .60 per gallon to .40 per gallon. Result,

DWL of tax necessarily decreases

For widgets, the supply curve is the typical upward-sloping straight line, and the demand 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 300 units. The deadweight loss from the tax is

$2,250 (15x300/2)

Tax on a good levied on buyers or on sellers

-Same outcome: a price wedge -Price paid by buyers - rises -Price received by sellers - falls -Lower quantity sold

Suppose the govt is considering levying a tax in 1 or more markets. Whick market min the DWL from the tax?

B (demand is very inelastic) D (Supply is very inelastic)

The price elasticities of supply and demand affect

Both the size of the DWL from a tax and tax incidence

As a tax on a good increases from $1 per unit to $2 per unit to $3 per unit

Tax revenue increases at first, but eventually peaks and then decreases

Tax on a good levied on sellers

The supply curve shifts upward by the size of the taxes

Ladder curve relates

The tax rate to tax revenue raised by tax

What happens to the total surplus in a market when the government imposes a tax?

Total surplus decreases

The size of the deadweight loss generated from a tax is affected by the

elasticities of both supply and demand

When a tax is imposed on a good, the

equilibrium quantity of the good always decreases

tax burden

falls more heavily on the side of the market that is less elastic

To fully understand how taxes affect economic well-being, we must compare the

reduced welfare of buyers and sellers to the revenue raised by the government

When a tax is placed on a product, the price paid by buyers

rises, and the price received by sellers falls

tax revenue

tax x quantity

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Area below DC and above Price

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it. Price received - willingness to sell. Area below Price above SC

Tax on a good levied on buyers

the demand curve shifts downward by the size of the tax

Labor taxes may distort labor markets greatly if

the number of hours many part time workers want to work is very sensitive to the wage rate