Effects of Taxation Flashcards
(55 cards)
What happens to consumer and producer surplus when the sale of a good is taxed?
Both consumer and producer surplus decline
Society’s total surplus with a tax is calculated with what?
Decline in consumer surplus + decline in producer surplus + Tax Revenue repaid to citizens
Is a total surplus under a tax greater or smaller than without
Smaller
How do the elasticities of supply and demand affect the deadweight loss of a tax? Why?
The greater the elasticities of demand and supply, the greater the deadweight loss of a tax. Since elasticity measures the response of quantity to a change in price higher elasticity mean the tax induces a greater reduction in quantity, hence, a greater distortion to the market.
Why do experts disagree about whether labour taxes have small or large deadweight losses?
They have different views about the elasticity of labour supply. Some believe it is inelastic, so a tax on labour has small deadweight loss. Others think that workers can adjust their hours worked in various ways so labour supply is elastic, and thus it has a large deadweight loss.
What is the relationship between deadweight loss and tax revenue?
Deadweight will rise at a higher rate than the tax revenue, as the tax rate rises. However, the revenue will eventually decline when the tax is at a high enough point.
What is the difference between a tax on goods and a voluntary transfer of the same amount to government in terms of efficiency?
There is no deadweight loss under a voluntary transfer, as there is no distortion to the market for goods. The total surplus, or efficiency, is higher.
In what condition can a tax that has no deadweight loss raise revenue for the government. Why?
A tax that has perfectly inelastic supply or demand has no effect on quantity nor any deadweight loss, but does raise revenue. Producers cannot reduce the output or find other inputs so they absorb the entire cost; alternatively consumers continue the same levels of demand. No transactions are lost in either case
In what condition can a tax that raises no revenue also have deadweight loss?
If it is a large enough tax that it stops all transactions because neither sellers nor buyers will incur the cost of supplying or buying the good, it has a massive deadweight loss and will raise no revenue.
With highly elastic supply and inelastic demand, the major surplus decline in a tax goes to the
consumer
With highly elastic demand and inelastic supply, the major surplus decline in a tax goes to the
producer
In a tax on heating oil, is the deadweight loss higher in the first year or the fifth year?
DWL will be higher in the fifth year. In first year the elasticity is low as people who own heaters are not gonna get rid of them immediately, but in the long term they will switch to other kinds of heaters so the tax will have a greater impact on quantity.
Is the revenue collected from a tax on heating oil greater in the first or fifth year?
First year, since elasticity is lower and quantity does not decline as much. However, if time passes and people substitute away, equilibrium quantity declines as does tax revenue.
Why is taxing food a good idea?
From the perspective of efficiency, it is good as demand is inelastic. It will not lead to much deadweight loss and will raise revenue well.
Why is taxing food a bad idea?
From an equity point of view, it is bad. Poorer people spend more of their income on food, so the tax will hit them harder than weather people
Will a 10,000 % tax raise much revenue?
Probably not. Because of the high tax rate, the equilibrium quantity in the market will be at or near zero.
Why would someone impose a 10,000 % tax on a good?
Wanting to ban the good
Under what conditions does the price received by producers remain constant in a tax?
Perfectly elastic supply
Under what conditions do total receipts for producers rise with a tax?
none
Under what conditions does the price paid by consumers remain constant in a tax?
if the demand is perfectly elastic.
Under what conditions does the total spending by consumers rise or fall in a tax?
If demand is elastic, the percentage decline in quantity exceeds the percentage increase in price, so total spending declines. If inelastic, the decline in quantity is less than the % increase in price, so total spending rises.
Can consumer surplus rise in any conditions with a tax?
Not really; it decreases the quantity and increases price, the two variables in determining surplus.
True or false. You cannot double revenue by doubling the tax on a good. Why?
Assuming neither supply nor demand is perfectly elastic or inelastic, the increase in tax will cause a smaller equilibrium quantity produced, meaning it is impossible for revenue to double. Multiplying tax per unit X quantity = a number less than double.
A tax on cola or on all soft drinks; which will raise more revenue? Why?
Tax on all soft drinks; the demand and supply is less elastic in a more widely defined market. They will have less substitutes and are hence less responsive to the price change.
