Chapter 8

Taxes cause deadweight loss because they

1. lead to losses in surplus for consumers and for producers that, when taken together, exceed tax revenue collect by the government 2. distort incentives to both buyers and seller 3. prevent buyers and sellers from realizing some of the gains from trade.

2 undersirabke price floors

1. surplus 2. overinvestment

When a tax is levied on buyers of a good,

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

The price eleasticites of supply and demand affect

both the size of the deadweight loss from a tax and the tax incidence

Total surplus with a tax is equal to

consumer surplus plus producer surplus plus tax revenue

The decrease in total surplus that results from a market distribution, such as tax, is called a

deadweight loss

A tax levied on the buyers of a good shifts the

demand curve downward

Consider a good to which a per unit tax applies. The greater the price elasticities of demand and supply for the good, the

greater the deadweight loss from the tax

Suppose the government increases the size of a tax by 20 percent. The deadweight loss from that tax

increases by more than 20 percent

When a tax is imposed on a good, the

equlibrum quantity of the good always decreases

When the government places a tax on a product, the cost of the tax to buyers and sellers

exceeds the revenue raised from the tax by the government

When a tax is levied on a good, the buyers and sellers of the good share the burden,

regardless of how the tax is levied

A tax levied on the sellers of a good shifts the

supply curve upward

The governments benefit from a tax can be measured by

tax revenue

The deadweight loss from a tax is larger

the larger is the amount of tax per unit

The amount of deadweight loss that results from a tax of a given size is determined by

the price elasticities of demand and supply

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

total surplus decreases