chapter 8 - the costs of taxation

Question 1

how are the markets worse off when goods are taxed?

Answer 1

costs of taxes to buyers and sellers typically exceeds the revenue raised by the government

Question 2

what does a tax do to supply and demand curves?

Answer 2

places a wedge between the price that buyers pay and the price that sellers receive (used to be one and the same)

Question 3

welfare of buyers

Answer 3

consumer surplus

Question 4

welfare of sellers

Answer 4

producer surplus

Question 5

government revenue formula

Answer 5

size of the tax x the quantity of the good sold (area of a square, h x w)

• benefit goes to whom ever the revenue is spent on

Question 6

what happens when a there is a tax on a good? (2 things)

Answer 6

reduces consumer surplus and producer surplus

deadweight loss (fall in producer and consumer surplus exceeds tax revenue)

Question 7

where is the total surplus after there is a tax?

Answer 7

the part of the curve that was not cut off by the tax

Question 8

deadweight loss

Answer 8

fall in total surplus that results when a tax or some other policy distort the outcome in an otherwise efficient market

Question 9

what sign is the change in consumer and producer surplus?

Answer 9

negative

Question 10

what sign is the change in tax revenue?

Answer 10

positive

Question 11

why do taxes produce deadweight loss?

Answer 11

when tax is imposed, it raises the price that buyers pay and lowers the price sellers receive, so there is incentive to buyers to consume less and sellers to produce less

Question 12

pure deadweight loss

Answer 12

loss to buyers and sellers in a market that is not offset by an increase in government revenue

Question 13

what determines if deadweight loss is big or small?

Answer 13

elasticity of supply and demand

Question 14

when is the deadweight loss larger?

Answer 14

when the supply or demand curve is more elastic

the greater the elasticity of supply and demand, the larger the deadweight loss of a tax

Question 15

small tax and deadweight loss

Answer 15

small deadweight loss and raises a small amount of revenue

Question 16

larger tax and deadweight loss

Answer 16

larger deadweight loss and raises more revenue

Question 17

laffer curve

Answer 17

tax revenue graph where the revenue rises first and then falls
- as the size of the tax grows larger, the deadweight loss will grow larger as well

tax rev first rises with the size of the tax, but as the tax increases further the market shrinks so much that the tax revenue starts to fall

Question 18

supply side economics

Answer 18

idea that if we cut taxes to be low, that would incentivize people to work more
- just will give the government more revenue because there was less work in general