The deadweight loss of tax on a commodity.
Answer to Problem 1CQQ
Option 'a' is correct.
Explanation of Solution
The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on the public expenditure of the government. The main types of taxes includes the income tax, wealth tax and the professional tax.
When a tax is imposed on the commodity, it will lead to an increase in the
Option (a):
The tax increases the price of the commodity and reduces the consumer surplus as well as the producer surplus because it increases the price paid by the consumer and reduces the price received by the producer. When the reduction in the total surplus which is the summation of the
Option (b):
When the reduction in the total surplus which is the summation of the consumer and producer surplus is higher than the total revenue generated from the taxation, there will be deadweight loss due to the tax on the commodity. Since, option 'b' explains the inverse of the actual situation, option 'b' is incorrect.
Option (c):
The tax increases the price of the commodity and reduces the consumer surplus as well as the producer surplus because it increases the price paid by the consumer and reduces the price received by the producer. The fall in the total surplus is known as the deadweight loss. Since, the total surplus is the summation of the consumer and the producer surplus, option 'c' is incorrect.
Option (d):
The fall in the total surplus is known as the deadweight loss and since the total surplus is the summation of the consumer and the producer surplus, a fall in any one of them will lead to deadweight loss and thus, option 'd' is incorrect.
Concept introduction:
Tax: It is the unilateral payment made by the public towards the government. There are different types of taxes in the economy which includes the income tax, property tax and professional tax and so on.
Deadweight loss: It is the reduction in the units where the marginal benefit to the consumer is higher than the marginal cost of production of the unit.
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Chapter 8 Solutions
EBK PRINCIPLES OF ECONOMICS
- Only typed answerarrow_forward. Draw a diagram to show the effect of a tax on producers. Show one demand curve and two supply curves (one before and one after the tax). Show the old and new prices and quantities. Use shading to show who gets the different parts of the surplus and indicate if there is any deadweight loss. Comment on implications for tax policy.arrow_forwardQuestion 5arrow_forward
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- If a constant $1 per unit tax is imposed on producers, A. producers can always pass the tax burden to consumers by raising the price by a dollar. B. producers will pay more than $0.5 tax for each unit of the good sold if supply is less elastic than demand. C. producers will pay less than $0.5 tax for each unit of the good sold if demand is more elastic than supply. D. producers must absorb the tax themselves and cannot raise the price.arrow_forwardSuppose the following graph depicts the supply and demand for a good after a tax is imposed. How much surplus is lost because of the tax? Price None Pi P₁ An amount equal to the tax. 9 Demand Curve Tax Supply Curve plus tax Supply Curve Quantity both producers and consumer lose all surplus. Othere is no way to tell since the demand curve is odd looking.arrow_forwardQuestion 6 When a tax per unit is placed on the buyer of a good: a the equilibrium price falls and the total amount spent by the buyer decreases if demand is elastic. b when prices increase from the tax, the supply increases because of the higher price. c the buyer and seller share the burden of the tax with the seller receiving relatively less and the buyer paying relatively more. d the seller charges all of the tax to the buyer since the tax was not placed on the seller.arrow_forward
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