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 price from the equilibrium level and the price to the consumer rises which will reduce 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
MANKIW: PRINCIPLES OF MACROECONOMICS
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