Assume a market has a downward sloping demand curve and an upward sloping supply curve.

Which of the following statements about the impact of a per unit tax on this market is NOT true?

Choose 1 answer:
(A) Deadweight loss is the surplus that is lost from buyers and sellers that are no longer able to participate in the market
(B) The tax burden is the consumer and producer surplus that becomes government revenue
(c) Unless both supply and demand are perfectly inelastic, a tax results in deadweight loss.
(D) When a per unit tax is imposed on a market, the price that buyers pay will always increase by the amount of the tax
(E) The more the quantity sold in the market decreases, the larger the deadweight loss will be

Question

Assume a market has a downward sloping demand curve and an upward sloping supply curve.

Which of the following statements about the impact of a per unit tax on this market is NOT true?

Choose 1 answer:
(A) Deadweight loss is the surplus that is lost from buyers and sellers that are no longer able to participate in the market
(B) The tax burden is the consumer and producer surplus that becomes government revenue
(c) Unless both supply and demand are perfectly inelastic, a tax results in deadweight loss.
(D) When a per unit tax is imposed on a market, the price that buyers pay will always increase by the amount of the tax
(E) The more the quantity sold in the market decreases, the larger the deadweight loss will be

Accepted Answer

∻Solution∻ ‖ a ⋮ Misconception about Tax Burden: The tax burden refers to the division of the amount of the tax paid by the buyers and the sellers, not the surplus that becomes government revenue. ‖ ‖ b ⋮ Deadweight Loss Definition: Deadweight loss is indeed the surplus lost from buyers and sellers no longer participating in the market due to the tax. ‖ ‖ c ⋮ Impact of Tax on Price Paid by Buyers: The price that buyers pay does not always increase by the full amount of the tax due to the tax incidence, which depends on the relative elasticities of supply and demand. ‖ ∻Answer∻ ⚹ (B) The tax burden is the consumer and producer surplus that becomes government revenue ⚹ ∻Key Concept∻ ⚹ Tax Burden ⚹ ∻Explanation∻ ⚹ The tax burden refers to how the tax is divided between buyers and sellers, not the conversion of consumer and producer surplus into government revenue. ⚹◊What is the formula to calculate deadweight loss in a market due to a per unit tax?⍭ Generate me a similar question◊

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