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    Finance 2

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    chanellayang124
    This document contains 5 questions about taxes and their effects on consumer and producer surplus, deadweight loss, and tax revenue. It explains that imposing a tax decreases consumer and producer surplus, and increases price. The tax revenue is represented by areas B+D in a supply-demand diagram, while the deadweight loss is areas C+E. Elasticities of supply and demand impact deadweight loss - more inelastic curves mean a smaller loss. Experts disagree on labor tax effects because of differing views on labor supply elasticity. Deadweight loss grows and revenue increases with tax size, until the tax becomes too large and reduces the market.

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    Finance 2

    Uploaded by

    chanellayang124
    7 views2 pages
    This document contains 5 questions about taxes and their effects on consumer and producer surplus, deadweight loss, and tax revenue. It explains that imposing a tax decreases consumer and producer surplus, and increases price. The tax revenue is represented by areas B+D in a supply-demand diagram, while the deadweight loss is areas C+E. Elasticities of supply and demand impact deadweight loss - more inelastic curves mean a smaller loss. Experts disagree on labor tax effects because of differing views on labor supply elasticity. Deadweight loss grows and revenue increases with tax size, until the tax becomes too large and reduces the market.

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    This document contains 5 questions about taxes and their effects on consumer and producer surplus, deadweight loss, and tax revenue. It explains that imposing a tax decreases consumer and producer surplus, and increases price. The tax revenue is represented by areas B+D in a supply-demand diagram, while the deadweight loss is areas C+E. Elasticities of supply and demand impact deadweight loss - more inelastic curves mean a smaller loss. Experts disagree on labor tax effects because of differing views on labor supply elasticity. Deadweight loss grows and revenue increases with tax size, until the tax becomes too large and reduces the market.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    7 views2 pages

    Finance 2

    Uploaded by

    chanellayang124
    This document contains 5 questions about taxes and their effects on consumer and producer surplus, deadweight loss, and tax revenue. It explains that imposing a tax decreases consumer and producer surplus, and increases price. The tax revenue is represented by areas B+D in a supply-demand diagram, while the deadweight loss is areas C+E. Elasticities of supply and demand impact deadweight loss - more inelastic curves mean a smaller loss. Experts disagree on labor tax effects because of differing views on labor supply elasticity. Deadweight loss grows and revenue increases with tax size, until the tax becomes too large and reduces the market.

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    Chapter 8: Questions for Review

    1. 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?
    Explain.

    When a good is taxed it will result in a decrease in the consumer and producer surplus.
    To expound on this, when tax is imposed on a product, its price will increase making it
    hard for other consumers to afford and purchase the product. As a result, the quantity
    demanded of the product will decrease, affecting the producer surplus in the process as
    sellers will earn less. Furthermore, a change in consumer and producer surplus depends
    on the elasticity of demand and supply, whereas tax revenue depends on the tax rate
    and the quantity sold.

    2. Draw a supply-and-demand diagram with a tax on the sale of a good. Show the
    deadweight loss. Show the tax revenue.

    In this diagram, the tax revenue is represented by area B+D and area C+E is the
    deadweight loss.

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

    Deadweight loss refers to the decrease of consumer and producer surplus due to the
    imposition of tax on a good or service. In relation, the elasticities of demand and supply
    heavily influence the deadweight loss. For instance, when the demand or supply for a
    product is inelastic, the deadweight loss of a tax will be small as an increase in price will
    only lead to a small decrease in the quantity demanded. Conversely, if the demand or
    supply for a product is elastic, the deadweight loss of a tax is relatively large as an
    increase in price results in a drastic decrease in the quantity demanded.

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

    Experts tend to disagree about the topic of whether labor taxes have small or large
    deadweight losses due to their different views about the elasticity of labor supply. For
    instance, many experts believe that the labor supply is elastic since they claim that most
    employees would opt to work fewer hours when a higher tax is imposed on their wage.
    As a result, these experts believe in the argument that labor taxes have a large
    deadweight loss. Conversely, there are also many experts who believe that labor supply
    is inelastic, claiming that most people would still be willing to work overtime and devote
    themselves to their jobs regardless if the tax reduces their overall wages since they only
    have limited options for earning an income. Therefore, these experts are convinced that
    labor taxes have a small deadweight loss.

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

    The deadweight loss and tax revenue will be affected depending on the size of the tax
    change. The deadweight loss grows larger as the size of tax rises from small to large.
    Similarly, the tax revenue also increases as the size of the tax continues to grow from
    small to medium. However, this is is not the case when the size of the tax increases from
    medium to large tax as higher taxes would usually reduce the market size since no one
    would be willing to buy and sell anymore. Therefore, the tax revenue would fall the
    moment the size of the tax change becomes large.

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