Ch. 8 Flashcards
(8 cards)
How does a tax on sellers shift the supply curve?
shifts the supply curve upward by that amount
How does a tax affect buyers?
it shifts the demand curve downward by the size of the tax
How do you calculate tax revenue?
The tax revenue that the government collects equals T*Q, the size of the tax, T, times the quantity sold, Q. Thus, tax revenue equals the area of the rectangle between the supply and demand curves.
What is deadweight loss?
the fall in total surplus that results from a market distortion
How do taxes cause deadweight losses?
Because they prevent buyers and sellers from realizing some of the gains from trade.
How does elasticity of a supply curve effect the deadweight loss of a tax?
The more elastic the supply curve, the larger the deadweight loss of the tax.
How does elasticity of a demand curve effect the deadweight loss of a tax?
The more elastic the demand curve, the larger the deadweight loss of the tax.
Why does a tax have a deadweight loss?
It induces buyers and sellers to change their behavior. The tax raises the price paid by buyers, so they consume less. At the same time, the tax lowers the price received by sellers, so they produce less.
