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Application: the Costs of Taxation
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What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus com-pare to the tax revenue? Explain.
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A tax on a good reduces the welfare of buyers and sellers. Because a tax on a good raises the price buyers pay and lowers the price sellers receive.
So a tax on a good reduces consumer surplus (benefit for buyers) and producer surplus (benefit for sellers)
Even though a tax on a good raises the revenue, there are losses to the buyers and sellers because of the tax which can exceed the revenue raised by the Government.
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Jane pays Chuck $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Chuck, he raises his price to $60. Jane continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?
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Tax and deadweight tax:
Mr. J pays $50 to Mr. C for mowing his lawn every week. Government imposed mowing tax of $10 on Mr. C, as a result, Mr. C raised his price to $60. Mr. J continues to hire him at new price also.
Mr. C increased the mowing price by $10 and pays the same amount as tax; hence, he does not feel better off. Hence, his producer surplus is 0.
Mr. J pays additional amount of $10 for mowing his lawn which is levied as mowing tax by the government. Hence, his consumer surplus is 0.
Mr. J wants to mow his loan; hence, the government earns revenue worth of $10 by imposing tax on mowing.
The consumer and producer surplus is zero and government revenue is $10.
Hence, the option 'a' is correct.
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Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax
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Levied tax on egg and deadweight loss:
Egg market has a linear and downward slopping demand curve and a linear and upward slopping supply curve. The tax rate on egg increased from $0.02 to $0.03.
The burden of tax will be bear by producers or consumers depend on the price elasticity of demand and supply.
If the demand for egg is price inelastic, then tax burden will be borne by the producers. Likewise, if the supply of egg is price inelastic, then tax burden will be borne by the consumers.
The consumer and producer surplus being derived from price elasticity of demand and supply will decide the deadweight loss.
Hence, the option 'd' is correct.
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Suppose- that the government imposes a tax on heating oil.
a. Would the deadweight loss- from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
b. Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
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Why do experts disagree about whether labor taxes have small or large deadweight losses?
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Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue
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Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollow-tipped bullets.
a. Do you expect that this tax would raise much revenue? Why or why not?
b. Even if the tax would raise no revenue, why might Senator Moynihan have proposed it?
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If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with __________ elasticities of demand and __________ elasticities of supply.
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Draw a supply-and-demand diagram with a tax on the sale of the good. Show the deadweight loss. Show the tax revenue.
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Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.
a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900. Calculate the amount of revenue this tax raises for Smalltown and the deadweight loss of the tax. (Hint: The area of a triangle is 1/2 X base X height.)
b. The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms rented falls to 800. Calculate tax revenue and deadweight loss with this larger tax. Do they double, more than double, or less than double? Explain.
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The market for. pizza is characterized by a downward-sloping demand curve and an upward-sloping supply curve.
a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer surplus. Is there any dead-weight loss? Explain.
b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the effect of this tax on the pizza market, being sure to label the consumer sur-plus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?
c. If the tax were removed, pizza eaters and sellers would be better off, but the government would lose tax revenue. Suppose that consumers and producers voluntarily transferred some of their gains to the government. Could all parties (including the government) be better off than they were with a tax? Explain using the labeled areas in your graph.
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How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have this effect?
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The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the
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The government places a tax on the purchase of socks.
a. Illustrate the effect of this tax on equilibrium price and quantity in the sock market. Identify the following areas both before and after the imposition of the tax: total spending by consumers, total revenue for producers, and government tax revenue.
b. Does the price received by producers rise or fall? Can you tell whether total receipts for producers rise or fall? Explain.
c. Does the price paid by consumers rise or fall? Can you tell whether total spending by consumers rises or falls? Explain carefully. (Hint: Think about elasticity.) If total consumer spending falls, does consumer surplus rise? Explain.
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Evaluate the following two statements. Do you agree? Why or why not?
a. "A tax that has no deadweight loss cannot raise any revenue for the government."
b. "A tax that raises no revenue for the government cannot have any deadweight loss."
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Consider the market for rubber bands.
a. If this market has very elastic supply and very inelastic demand, how would the bur-den of a tax on rubber bands be shared between consumers and producers? Use the tools of consumer surplus and producer sur-plus in your answer.
b. If this market has very inelastic supply and very elastic demand, how would the burden of a tax on rubber bands be shared between consumers and producers? Contrast your answer with your answer to part (a).
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After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. In what sense is taxing food a "good" way to raise revenue? In what sense is it not a "good" way to raise revenue?
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This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite policy. Suppose that the government subsidizes a good: For each unit of the good sold, the government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.
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