Econ Chapter 8

What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue?

A tax on a good reduces the welfare of buyers and sellers of the good , and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus- the sum of consumer surplus, producer surplus, and tax revenue- is called the deadweight loss

A tax that raises no revenue for the government can create deadweight loss.

True

A perfectly elastic supply curve is

horizontal

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue

increases by less than 50 percent and may even decline.

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with elasticities of demand and elasticities of supply.

small, small

Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?

$0, -$10, $0

What happens to the deadweight loss and tax revenue when a tax is increased?

As a tax grows larger, it distorts incentives more, and its DW loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if the tax gets large enough, tax revenue starts to fall.

Why do experts disagree about whether labor taxes have small or large deadweight losses?

Economists disagree about these issues in part because there is no consensus about eh size of the relevant elasticities. Also the general lesson is that a change in tax revenue from a tax change depends on how the tax change affects peoples behavior.

When the supply of the goods is perfectly elastic, the government can raise tax revenue without creating deadweight loss by taxing the consumers.

False

How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?

Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus.

A tax that has no deadweight loss cannot raise any revenue for the government.

false

True or False: A tax on food leads to larger deadweight loss than a tax on goods with more elastic demand.

false

True or False: Taxing food is a good way to raise revenue from an equality point of view because everyone consumes food.

false

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the

government's tax revenue.

A perfectly elastic demand curve is

horizantal

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax

increases by more than 50 percent

An increase in the size of a tax is most likely to increase tax revenue in a market with

inelastic demand and inelastic supply.

deadweight loss

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

A tax on a good has a deadweight loss if

the reduction in consumer and producer surplus is greater than the tax revenue.

The government can raise revenue by taxing the sellers without creating deadweight loss when the demand for the goods being taxed is perfectly inelastic.

true

True or False: The deadweight loss from this tax would likely be larger in the fifth year after it is imposed than in the first year as demand for heating oil become more elastic.

true