Principles of Economics Study Set 3

Total surplus is always equal to the sum of consumer surplus and producer surplus.

Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue.

When a tax is imposed on buyers,consumer surplus and producer surplus both decrease.

When a tax is imposed on buyers,consumer surplus decreases but producer surplus increases.

When a tax is imposed on sellers,producer surplus decreases but consumer surplus increases.

When a tax is imposed on sellers,consumer surplus and producer surplus both decrease.

Taxes affect market participants by increasing the price paid by the buyer and received by the seller.

Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller.

A tax raises the price received by sellers and lowers the price paid by buyers.

Normally,both buyers and sellers of a good become worse off when the good is taxed.

When a good is taxed,the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax.

A tax places a wedge between the price buyers pay and the price sellers receive.

A tax on a good causes the size of the market to increase.

A tax on a good causes the size of the market to shrink.

When a tax is imposed,the loss of consumer surplus and producer surplus as a result of the tax exceeds the tax revenue collected by the government.

Economists use the government's tax revenue to measure the public benefit from a tax.

Because taxes distort incentives,they cause markets to allocate resources inefficiently.

Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.

As the price elasticities of supply and demand increase,the deadweight loss from a tax increases.

The greater the elasticity of demand,the smaller the deadweight loss of a tax.