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