Exam 8: Application: The Costs of Taxation

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'. According to this statement, suppose both forest products and coffee have the same percentage tax applied to them, the fall in quantity supplied of forest products will be:

The demand for bread is less elastic than the demand for donuts; hence, ceteris paribus, a tax on bread will create a larger deadweight loss than will the same tax on donuts.

If a tax did not induce buyers or sellers to change their behaviour, it would not cause a deadweight loss.

One of the important economic costs of imposing taxes on a market is the deadweight loss.

When a tax is levied on a good buyers are worse off but not sellers.

If the size of a tax doubles, the deadweight loss rises by a factor of six.

The greater the elasticities of demand and supply the:

Graph 8-3 -According to Graph 8-3, the amount of deadweight loss in this market resulting from the levying of the tax is:

Using the graph below for cases of microwave popcorn, calculate: a. equilibrium price. b. equilibrium quantity. c. consumer surplus. d. producer surplus. Now suppose that the government imposes a fat tax $2 tax per case on the sellers of microwave popcorn. Show this on the graph and calculate each of the following after the tax is imposed: e. price paid by buyers f. price received by sellers g. consumer surplus h. producer surplus i. government revenue j. deadweight loss

Taxes may cause deadweight losses because:

As the size of a tax decreases:

Assume that Jane cleans Joe's house weekly for $80. Joe would be willing to pay as much as $100 weekly to have his house cleaned. Jane's opportunity cost is $70. -According to the information provided, if Jane cleans Joe's house, the producer surplus is:

Suppose the demand curve becomes more elastic, but nothing else changes, this implies that the deadweight loss from a given tax will be smaller.

What happens to the trade revenue when a tax is imposed? Explain.

The deadweight economic loss from taxes:

A tax on a good:

One result of a tax on a good is that the equilibrium quantity sold tends to rise.

Graph 8-2 This graph shows supply and demand in a free market. -According to Graph 8-2, when the market is in equilibrium, producer surplus is represented by area:

Because taxes distort incentives, they cause markets to allocate resources inefficiently.

Supply-side economics can be a winning strategy in many computer games.