that mean it would raise a small amount of tax revenue? Or would that mean that tax revenue would be larger-because deadweight loss is smaller?
that mean it would raise a small amount of tax revenue? Or would that mean that tax revenue would be larger-because deadweight loss is smaller?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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I have a picture of the question added as well as a photo from my Econ book. The photo in my book shows how the supply curve, when vertical, the deadweight loss from a tax is small.  this is why I chose option a. Because wouldn’t that mean it would raise a small amount of tax revenue? Or would that mean that tax revenue would be larger-because deadweight loss is smaller? 
Transcribed Image Text:### Understanding the Impact of Elasticity on Taxation
In panels (a) and (b), the demand curve and the size of the tax are the same, but the price elasticity of supply is different. Notice that the more elastic the supply curve, the larger the deadweight loss of the tax. In panels (c) and (d), the supply curve and the size of the tax are the same, but the price elasticity of demand is different. Notice that the more elastic the demand curve, the larger the deadweight loss of the tax.
#### Panel (a): Inelastic Supply
**Graph Details:**
- **Title:** Inelastic Supply
- **Axes:**
- Vertical axis: Price
- Horizontal axis: Quantity
- **Curves:**
- Supply curve is steep (relatively inelastic).
- Demand curve is downward sloping.
- **Highlighted Information:**
- The size of the tax is shown as a vertical gap between the supply and demand curves.
- Deadweight loss (DWL) area is minimal.
- Annotation: "When supply is relatively inelastic, the deadweight loss of a tax is small."
#### Panel (b): Elastic Supply
**Graph Details:**
- **Title:** Elastic Supply
- **Axes:**
- Vertical axis: Price
- Horizontal axis: Quantity
- **Curves:**
- Supply curve is flatter (relatively elastic).
- Demand curve is downward sloping.
- **Highlighted Information:**
- The size of the tax is shown as a vertical gap between the supply and demand curves.
- Deadweight loss (DWL) area is larger compared to Panel (a).
- Annotation: "When supply is relatively elastic, the deadweight loss of a tax is large."
#### Panel (c): Inelastic Demand
**Graph Details:**
- **Title:** Inelastic Demand
- **Axes:**
- Vertical axis: Price
- Horizontal axis: Quantity
- **Curves:**
- Supply curve is upward sloping.
- Demand curve is steep (relatively inelastic).
- **Highlighted Information:**
- The size of the tax is shown as a vertical gap between the supply and demand curves.
- Deadweight loss (DWL) area is minimal.
- Annotation: "When demand is relatively inelastic, the deadweight loss of a tax is small."
Transcribed Image Text:### Question:
If the labor supply curve is nearly vertical, a tax on labor _________.
### Answer Choices:
- **will raise small amounts of tax revenue**
- **has a large deadweight loss**
- **Both b and c are correct.**
- **has little impact on the amount of work workers are willing to do**
### Explanation:
When the labor supply curve is nearly vertical, it indicates that the quantity of labor supplied is relatively unresponsive to changes in wages. Therefore, imposing a tax on labor would likely have the following implications:
- **Small Amounts of Tax Revenue:** This choice is usually incorrect as a nearly vertical supply curve suggests that the quantity supplied remains almost constant despite a price change, thus generating significant tax revenue.
- **Large Deadweight Loss:** This could be a potential outcome because the vertical supply curve indicates inefficiency in taxation, leading to loss of welfare.
- **Both b and c are correct:** This implies there is a combination of significant deadweight loss and potentially another correct result.
- **Little Impact on the Amount of Work Workers are Willing to Do:** This is the most likely correct answer. A vertical supply curve suggests that the willingness to work does not change much due to the tax, indicating inelastic labor supply.
Understanding the labor supply curve's behavior is critical in predicting the effects of fiscal policies on labor markets.
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