Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax.
-Refer to Figure 8-23. If the economy is at point B on the curve, then a small decrease in the tax rate will
A)increase the deadweight loss of the tax and increase tax revenue.
B)increase the deadweight loss of the tax and decrease tax revenue.
C)decrease the deadweight loss of the tax and increase tax revenue.
D)decrease the deadweight loss of the tax and decrease tax revenue.

Question

Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax. 
-Refer to Figure 8-23. If the economy is at point B on the curve, then a small decrease in the tax rate will
A)increase the deadweight loss of the tax and increase tax revenue. 
B)increase the deadweight loss of the tax and decrease tax revenue. 
C)decrease the deadweight loss of the tax and increase tax revenue. 
D)decrease the deadweight loss of the tax and decrease tax revenue.

Quizplus · Accepted Answer

According to the figure, at point B, the tax rate is at an optimum level where tax revenue is maximized and deadweight loss is minimized. A small decrease in the tax rate from this point will result in an increase in the quantity demanded, which will increase tax revenue. Additionally, since the decrease is small, the reduction in deadweight loss will also be small, leading to a net increase in tax revenue. Therefore, decreasing the tax rate slightly from point B will decrease the deadweight loss of the tax and increase tax revenue.