3. The government of a small country needs to raise money to fund school improvements. It is considering implementing a tax on rice to raise money. (a) Using a supply and demand diagram, explain why the tax will cause a deadweight loss. (b) Rice is an important part of its citizens' diet and has a demand elasticity of –0.2. Cars are a luxury good and have a demand elasticity of –3. Assume both rice and cars are imported into the country so supply is perfectly elastic. Which tax will cause a greater deadweight loss? Explain why using economic arguments. Which good do you think the government should tax? Why? Your explanation can incorporate whatever reasons you think are important.
3. The government of a small country needs to raise money to fund school improvements. It is considering implementing a tax on rice to raise money. (a) Using a supply and demand diagram, explain why the tax will cause a deadweight loss. (b) Rice is an important part of its citizens' diet and has a demand elasticity of –0.2. Cars are a luxury good and have a demand elasticity of –3. Assume both rice and cars are imported into the country so supply is perfectly elastic. Which tax will cause a greater deadweight loss? Explain why using economic arguments. Which good do you think the government should tax? Why? Your explanation can incorporate whatever reasons you think are important.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. The government of a small country needs to raise money to fund school improvements. It is
considering implementing a tax on rice to raise money.
(a) Using a supply and demand diagram, explain why the tax will cause a deadweight loss.
(b) Rice is an important part of its citizens' diet and has a demand elasticity of –0.2. Cars
are a luxury good and have a demand elasticity of –3. Assume both rice and cars are
imported into the country so supply is perfectly elastic. Which tax will cause a greater
deadweight loss? Explain why using economic arguments. Which good do you think the
government should tax? Why? Your explanation can incorporate whatever reasons you
think are important.
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