Microeconomics Chapter 8

How a tax affects market participants

- fall in consumer surplus - fall in producer surplus - the increase in tax revenue - the losses to buyers and sellers exceed the revenue raised by the government

when supply and demand is relatively inelastic the deadweight loss of tax is ...

Small

Suppose the tax on gasoline is raised from $0.50 per gallon to $2.50 per gallon. As a result, a. tax revenue necessarily increases. b. the deadweight loss of the tax necessarily increases. c. the supply curve for gasoline necessarily becomes steeper. d. All of the above are correct.

b. the deadweight loss of the tax necessarily increases.

Figure 8-4 Refer to Figure 8-4. Producer surplus before the tax was imposed is represented by area a. A. b. A + B + C. c. D + E + F. d. F.

c. D + E + F

deadweight loss

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

Why do taxes cause deadweight losses?

they prevent buyers and sellers from realizing some of the gains from trade

What determines whether the deadweight loss from a tax is large or small?

- how much the quantity supplied and quantity demanded respond to changes in the price. - depends of the price elasticities of supply and demand

What do Taxes do ?

- reduce the equilibrium quantity, - increase the price paid by buyers, and - decrease the price received by sellers.

the greater the elasticities of supply and demand ...

- the larger the decline in equilibrium quantity - the greater the deadweight loss of tax

the decrease in total surplus that is caused by a tax is

= the deadweight loss of the tax

Laffer curve

A relationship between the tax rates and tax revenues.

the benefit of tax

Governments earn revenue from taxes. the tax amount X the quantity of good sold = government tax revenue.

when supply and demand is relatively elastic the deadweight loss of tax is ...

Large

Do buyers benefit from buying (consumer surplus)

YES

Do sellers benefit from selling (Producer surplus)

YES

without the taxes we would not have .....

a functioning government

Scenario 8-1 Ryan is willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. If Tammy cleans Ryan's house for $80, Tammy's producer surplus is a. $10. b. $70. c. $80. d. $100.

a. $10.

Scenario 8-1 Ryan is willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. Assume Ryan is required to pay a tax of $40 when he hires someone to clean his house for a week. Which of the following is correct? a. Ryan will now clean his own house. b. Tammy will continue to clean Ryan's house but her producer surplus will decline. c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will increase. d. Ryan will continue to hire Tammy to clean his house but his consumer surplus will decline.

a. Ryan will now clean his own house.

A tax on a good ..... a. raises the price that buyers actually pay and raises the price that sellers actually receive. b. raises the price that buyers actually pay and lowers the price that sellers actually receive. c. lowers the price that buyers actually pay and raises the price that sellers actually receive. d. lowers the price that buyers actually pay and lowers the price that sellers actually receive.

b raises the price that buyers actually pay and lowers the price that sellers actually receive.

The tax causes a reduction in consumer surplus that is represented by area a. A. b. B + C. c. D + E. d. F.

b. B + C.

Consider a good on which a per-unit tax is imposed. The greater the price elasticities of demand and supply for the good, the a. smaller the deadweight loss from the tax. b. greater the deadweight loss from the tax. c. more efficient is the tax. d. more equitable (or, fair) is the distribution of the tax burden between buyers and sellers.

b. greater the deadweight loss from the tax.

Refer to Figure 8-4. The benefit to the government from the tax is a. measured by tax revenue and is represented by area A + B. b. measured by tax revenue and is represented by area B + D. c. measured by the net gain in total surplus and is represented by area B + D. d. measured by the net gain in total surplus and is represented by area D + E.

b. measured by tax revenue and is represented by area B + D.

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. Further suppose that the tax reduces consumer surplus by $3,000 and that it reduces producer surplus by $4,400. Then, the deadweight loss of the tax is a. $200. b. $400. c. $600. d. $1,200.

c. $600.

Which of the following statements is true for markets in which the demand curve slopes downward and the supply curve slopes upward? a. As the size of the tax increases, tax revenue continually rises and deadweight loss continually falls. b. As the size of the tax increases, tax revenue and deadweight loss rise initially, but both eventually begin to fall. c. As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss continually rises. d.As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss falls initially, but eventually it begins to rise.

c. As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss continually rises.

Other things equal, the deadweight loss of a tax a. decreases as the size of the tax increases. b. increases as the size of the tax increases, but the increase in the deadweight loss is less rapid than the increase in the size of the tax. c. increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax. d. increases as the price elasticities of demand and/or supply increase, but the deadweight loss does not change as the size of the tax increases.

c. increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax.

The benefit that a government receives from a tax is measured by a. the change in the equilibrium quantity of the good. b. the change in the equilibrium price of the good. c. its tax revenue. d. the total surplus.

c. its tax revenue.

If the per-unit tax on a good is doubled, the deadweight loss of the tax a. remains constant. b. doubles. c. quadruples. d. decreases by a percentage that cannot be determined without further information.

c. quadruples.

increase in tax

causes decrease in quantity

Refer to Figure 8-4. The loss in total surplus that results from a tax is called the deadweight loss of the tax. This deadweight loss is represented by area a. A + B + D + F. b. A + B + C. c. D + E + F. d. C + E.

d. C + E.

When a tax is being collected on the production or consumption of a good or service, total surplus is equal to a. consumer surplus plus producer surplus. b. consumer surplus minus producer surplus. c. consumer surplus plus producer surplus minus tax revenue. d. consumer surplus plus producer surplus plus tax revenue.

d. consumer surplus plus producer surplus plus tax revenue.

Scenario 8-1 Ryan is willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. If Ryan pays Tammy $80 to clean his house, Ryan's consumer surplus is a. $100. b. $80. c. $70. d. $20.

d. $20.

Refer to Figure 8-4. The total surplus (consumer, producer, and government) after the tax is imposed is represented by area a. C + E. b. A + B + C. c. D + E + F. d. A + B + D + F.

d. A + B + D + F.

Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things equal, a. the larger is the decrease in quantity demanded as a result of the tax. b. the smaller is the tax burden on buyers relative to the tax burden on sellers. c. the larger is the deadweight loss of the tax. d. All of the above are correct.

d. All of the above are correct.

efer to Figure 8-4. After the tax is imposed, producer surplus is represented by area a. A. b. A + B + C. c. D + E + F. d. F.

d. F.

If the size of a tax increases, tax revenue a. definitely increases. b. definitely decreases. c. definitely remains the same. d. may increase, decrease, or remain the same.

d. may increase, decrease, or remain the same.

The cost of a tax ....

exceeds the benefit of a tax

the cost of tax

is the fall in output (so sales) as a result of tax

As the size of a tax increases

its deadweight loss quickly gets larger

The equilibrium outcome in a perfectly competitive market ....

maximises the total surplus of society

as the tax gets larger, the quantity bought and sold ....

shrinks so much that the tax revenues start to fall

tax revenue =

tax rate X quantity bought and sold

with each increase in the tax rate the deadweight loss of the ....

tax rises even more rapidly than the size of the tax

when the tax rate doubles ....

the deadweight loss quadruples