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
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- The graph shows the market for posters in which the government has imposed a tax of $2 per poster. Draw a point to show the price paid by buyers and the quantity bought. Draw shapes that represent the following: 1) consumer surplus. Label it CS. 2) producer surplus. Label it PS. 3) the tax revenue received by the government. Label it TR. 4) the deadweight loss created by the tax. Label it DWL. >>> A label can be repositioned by clicking on the edge of the label box and dragging it onto the shape. F Carrow_forwardOnly typed answerarrow_forwardThe graph shows the market for mechanical pencils in which the government has imposed a sales tax of $2 per mechanical pencil on sellers. Draw a point at the price paid by the buyers and the quantity of mechanical pencils bought. Draw the government's tax revenue. Label it TR. Draw the producer surplus. Label it PS. Draw the consumer surplus. Label it CS. Draw the deadweight loss from the tax. Label it DWL. >>> A label box can be dragged by its edge to a new position. 18.00 16.00- 14.00- 12.00- 10.00- 8.00- 6.00- 4.00- 2.00- 0.00+ 0 Price (dollars per mechanical pencil) D S+ tax S 2 4 8 10 12 14 6 Quantity (millions of mechanical pencils per year) >>> Draw only the objects specified in the question.arrow_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_forwardWhat happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? Cite Examples and Explainarrow_forward
- Help please 33arrow_forwardQuestion 27 When the government places a tax on the producer of a good or service O both the supply and demand curves for the good or service shifts to the left. the supply curve for the good or service shifts to the right. O the demand curve for the good or service shifts to the right. the supply curve for the good or service shifts to the left. the demand curve for the good or service shifts to the left.arrow_forwardQuestion 5: Consumer and Producer surplus Consumer and Producer surplus Stax P $500 S $200 $120 $X $50 80 150 Q Assume an excise tax of $130 per-unit tax has resulted in a decrease in Supply as shown on the graph above. Show all your work. a. How much is the value of X (intercept of the_green line). How do you describe what that value is? b. How much is the consumer surplus before the tax? c. How much is producer surplus before the tax? d. How much is the consumer surplus after the tax? e. How much is producer surplus after the tax? f. How much tax revenue was raised by the government as a result of this taxation g. How much is the deadweight loss as a result of the taxarrow_forward
- a. What is the deadweight loss of a tax? b. How is the deadweight loss of a tax related to the elasticity of the demand and supply curves? c. Consider a tax on the producers in a market. By using supply and demand curves, show the consumer surplus, producer surplus, the equilibrium price and quantity traded before tax. Now show the consumer surplus, producer surplus, equilibrium price and quantity traded after tax. What happens to consumer surplus, producer surplus, equilibrium price and quantity traded after tax? Finally make sure to show the revenue of the tax and the deadweight loss associated with the tax.arrow_forwardFigure 8-1 PRICE 9 P™ K P M N B QUANTITY Supply consumer surplus after the tax. consumer surplus before the tax. O producer surplus after the tax. O producer surplus before the tax. Demand Refer to Figure 8-1. Suppose the government imposes a tax of P-P". The area measured by L+M+Y representsarrow_forwardIf 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_forward
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