Chapter 8 T & F – Flashcards

Normally, both buyers and sellers are worse off when a good is taxed.

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

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

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

Often, tax revenue collected by the government equals reduced welfare of buyers and sellers caused by the tax.

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

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

If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss.

The demand for bread is less elastic than the demand for donuts, hence, a tax on bread will create a larger deadweight loss than will the same tax on donuts.

The more inelastic the demand and supply curves, the greater the deadweight loss of a tax.

If the supply curve is more elastic, ceteris paribus, the deadweight loss from a given tax will be larger

As the size of the tax increases, the governments tax revenue rises, the falls.

Although tax revenue eventually begins to fall as tax rates increase, the revenue will always be greater than zero no matter how large the tax is.

The LAFFER curve is the curve showing how tax revenue varies as tax rates vary.

The more elastic the supply and demand curves in a market, the more taxes in their market distort behavior, and the more likely it is that a tax cut will raise tax revenue.

When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market efficiency.