The Laffer curve illustrates that
A)deadweight loss rises by the square of the increase in a tax.
B)deadweight loss rises exponentially as a tax increases.
C)tax revenue first rises,then falls as a tax increases.
D)Both a)and b)are correct.

Question

Quizplus · Accepted Answer

The Laffer curve shows the relationship between tax rate and tax revenue. As tax rates increase, tax revenue first rises, then begins to fall as people change their behavior to avoid or evade the tax. This occurs because higher taxes can discourage work and investment, leading to lower economic activity and therefore lower tax revenue. The curve is not necessarily symmetric, and the point at which revenue-maximizing tax rates are reached varies depending on the tax base and other factors. Options A and B are incorrect because they describe the relationship between deadweight loss and tax increases, not tax revenue and tax increases.

The Laffer Curve Illustrates That