Which of the following statements correctly describes the relationship between the size of the deadweight loss and the amount of tax revenue as the size of a tax increases from a small tax to a medium tax and finally to a large tax?
A)Both the size of the deadweight loss and tax revenue increase.
B)The size of the deadweight loss increases,but the tax revenue decreases.
C)The size of the deadweight loss increases,but the tax revenue first increases,then decreases.
D)Both the size of the deadweight loss and tax revenue decrease.

Question

Quizplus · Accepted Answer

As the tax increases from a small tax to a medium tax, the deadweight loss increases but the tax revenue also increases. However, as the tax continues to increase to a large tax, the deadweight loss continues to increase but the tax revenue begins to decrease. This occurs because as the tax becomes larger, it creates a larger disincentive for individuals to engage in the taxed activity, reducing the overall amount of economic activity and therefore, tax revenue.

Which of the Following Statements Correctly Describes the Relationship Between