Econ Chapter 8

taxes

- taxes make consumer surplus/producer surplus smaller - provide money to govt. for public services -creates deadweight loss -as tax increases deadweight loss increases(even more rapidly than the size of the tax)

price elasticities of supply and demand

-the more the elastic supply curve the larger deadweight loss -the more elastic the demand curve the larger the deadweight loss -the greater the elasticities of supply and demand the greater the deadweight loss at the tax

Economists generally agree that the most important tax in the U.S. economy is the

labor tax.

Concerning the labor market and taxes on labor, economists disagree about

the size of the deadweight loss of the tax on labor

Who once said that taxes are the price we pay for a civilized society?

Oliver Wendell Holmes, Jr.

Laffer curve

a graph of the assertion that taxes may increase tax revenue for awhile, but very large taxes may also reduce tax revenue

When a tax is levied on a good,

a wedge is placed between the price buyers pay and the price sellers effectively receive.

The graph that represents the amount of deadweight loss (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like

an upward-sloping curve.

A tax placed on a good

causes the equilibrium quantity of the good to decrease.

The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that Arthur Laffer was correct when he asserted that cuts in tax rates would increase tax revenue.

false

Total surplus is always equal to the sum of consumer surplus and producer surplus.

false

When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax.

false

As more people become self-employed, which allows them to determine how many hours they work per week, we would expect the deadweight loss from the Social Security tax to

increase, and the revenue generated from the tax to decrease.

If the tax on a good is doubled, the deadweight loss of the tax

quadruples.

supply in more elastic

tends to make deadweight losses larger-all else equal

the size of the tax is larger

tends to make deadweight losses larger-all else equal

demand is more inelastic

tends to make deadweight losses smaller-all else equal

the size of the tax is smaller

tends to make deadweight losses smaller-all else equal

Deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss.

true

Taxes on labor tend to encourage the elderly to retire early.

true

When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax exceeds the tax revenue collected by the government.

true