Chapter 9: Taxes

Question 1

What does this chapter examine regarding taxes?

Answer 1

The impact of taxes on consumer and producer surplus and market efficiency, focusing on unit taxes.

Question 2

What is a unit tax?

Answer 2

A tax defined as a fixed dollar amount per unit, unlike a percentage-based tax.

Question 3

How does a tax create a price wedge?

Answer 3

By raising the price buyers pay and lowering the price sellers receive, reducing the quantity sold.

Question 4

Who bears more of the tax burden when demand is more inelastic than supply?

Answer 4

Buyers, because they are less flexible and cannot easily reduce quantity demanded.

Question 5

Who bears more of the tax burden when supply is more inelastic than demand?

Answer 5

Sellers, because they are less flexible and cannot easily reduce quantity supplied.

Question 6

What is the “wedge shortcut” in tax analysis?

Answer 6

A method of finding post-tax prices and quantities by adding the tax as a vertical distance between the supply and demand curves.

Question 7

How is tax revenue calculated?

Answer 7

Tax Revenue = Tax * Quantity Sold

Question 8

How does a tax affect consumer and producer surplus?

Answer 8

Both consumer and producer surplus decrease after a tax is imposed.

Question 9

What does total surplus represent in a market?

Answer 9

The total benefit to society from the market, including consumer surplus, producer surplus, and tax revenue.

Question 10

What is deadweight loss?

Answer 10

The decrease in total surplus that occurs because a tax prevents some mutually beneficial transactions.

Question 11

Why do taxes cause deadweight loss?

Answer 11

They reduce the quantity sold, preventing transactions where buyer value exceeds seller cost, thus reducing market efficiency.

Question 12

What is the main conclusion about the effect of taxes on markets?

Answer 12

Taxes create deadweight loss by making buyers and sellers worse off, reducing total market surplus.

Question 13

What is the relationship between tax costs and tax benefits?

Answer 13

Taxes reduce consumer and producer surplus more than the tax revenue gained, leading to deadweight loss.

Question 14

Why do economists suggest taxing markets with low deadweight loss?

Answer 14

Taxing markets with low deadweight loss minimizes the economic costs while still raising necessary revenue.

Question 15

How do price elasticities affect the deadweight loss from taxation?

Answer 15

Higher elasticities of supply or demand increase deadweight loss because more transactions are prevented.

Question 16

What happens to deadweight loss when supply or demand is inelastic?

Answer 16

Deadweight loss is low because few transactions are lost due to the tax.

Question 17

What happens to deadweight loss when supply or demand is elastic?

Answer 17

Deadweight loss is high because the tax significantly reduces the quantity bought and sold.

Question 18

Which markets should governments prioritize for taxation to minimize deadweight loss?

Answer 18

Governments should tax markets with inelastic supply or demand to reduce deadweight loss.

Question 19

How does increasing the tax size affect deadweight loss?

Answer 19

Increasing the tax size increases deadweight loss disproportionately faster than the tax increase.

Question 20

What happens to deadweight loss if a tax is doubled or tripled?

Answer 20

Doubling the tax quadruples deadweight loss, and tripling the tax increases deadweight loss by nine times.

Question 21

How does tax size initially affect tax revenue?

Answer 21

Tax revenue initially increases with tax size but eventually falls when taxes are too high and discourage transactions.

Question 22

What does the Laffer Curve illustrate?

Answer 22

The Laffer Curve shows that at high tax rates, increasing the tax rate can actually decrease total revenue.

Question 23

What is the policy implication for low vs. high taxes on society?

Answer 23

For low taxes, increasing them has minimal harm, but for high taxes, increasing them can greatly harm society and efficiency.

Question 24

How do taxes affect consumer and producer surplus?

Answer 24

Taxes decrease consumer and producer surplus, creating deadweight loss as the total surplus reduction exceeds the tax revenue gained.

Question 25

Why do taxes create deadweight loss?

Answer 25

Taxes cause buyers to buy less and producers to sell less, reducing equilibrium quantity and total surplus.

Question 26

How does the elasticity of supply or demand affect deadweight loss from taxes?

Answer 26

Larger elasticities lead to greater deadweight losses because they indicate higher sensitivity to price changes.

Question 26

What happens to tax revenue when taxes are low vs. high?

Answer 26

When taxes are low, increasing them has minimal impact, but when taxes are high, further increases can lower tax revenue.