Suppose the government increases the size of a tax by 20 percent. The deadweight loss from that tax
A)increases by 20 percent.
B)increases by more than 20 percent.
C)increases but by less than 20 percent.
D)decreases by 20 percent.

Question

Quizplus · Accepted Answer

The deadweight loss from a tax increases more than proportionally with the size of the tax. This is because the deadweight loss is related to the square of the tax size, meaning a 20 percent increase in the tax size leads to more than a 20 percent increase in the deadweight loss.

Suppose the Government Increases the Size of a Tax by 20