L8: Deadweight Loss and Optimal Taxation

Question 1

excess burden of taxation

Answer 1

social cost of raising revenue in excess of the tax revenue collected

Question 2

implication with efficiency costs of taxation with regards to elasticity

Answer 2

looking to impose taxes in markets with low elasticities, where there’s not that much responsiveness

Question 3

implication with efficiency costs of taxation with regards to tax rates

Answer 3

looking to spread taxes over commodities rather than concentrating taxation in specific markets

deadweight loss goes up with the square of the tax and not the tax itself

Question 4

ramsey rule

Answer 4

to minimise deadweight loss, taxes should be set across commodities so that the marginal excess burden of taxation per dollar is the same

Question 5

inverse elasticity rule

Answer 5

tax rates should be higher on goods with lower demand elasticities

Question 6

equity implications of the ramsey model

Answer 6

commodities with low price elasticities are necessities
- but luxury goods tend to have high price elasticities

taking equity into account works against or reverses the ramsey rule prescriptions

Question 7

implication with efficiency costs of taxation with regards to distortions

Answer 7

avoiding exacerbating existing distortions

Question 8

government’s role in efficiency costs of taxation

Answer 8

governments should try to smooth tax rates over time

having a relatively constant tax rate over time rather than high taxes in some periods and low taxes in others

Question 9

progressivity and efficiency costs of taxation

Answer 9

progressive taxes have more deadweight loss than proportional taxes
- tradeoff between equity and efficiency

Question 10

laffer curve

Answer 10

relationship between tax rates and the amount of tax revenue collected by governments

at some point, you reach a point where revenue goes down even if you keep raising taxes