ECON Ch. 8

Laffer Curve

a graph showing the relationship between the size of a tax, and the tax revenue collected

Which of the following would likely cause the greatest deadweight loss?

a tax on cruise line tickets

Deadweight loss is greatest when

both supply and demand are relatively elastic

A tax on gasoline is likely to

cause a greater deadweight loss in the long run when compared to the short run

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

increases by a factor of four

Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a

small deadweight loss, and the burden of the tax would fall on the seller of diamonds

Tax Wedge

the difference between what the buyer pays, and the seller receives, when a tax is placed in a market

Deadweight Loss

the reduction in total surplus that results from a tax

What is true with regard to the burden of a tax where supply is more inelastic than demand?

the sellers pay a larger portion of the tax

Taxes on labor income tend to encourage

workers to work fewer hours, second earners to stay home, the elderly to retire early, and the unscrupulous to enter the underground economy