Ch. 8 Microeconomics

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The Effects of a Tax

answer

Tax revenue can fund beneficial services (e.g. education, roads, police), so we include it in total surplus

question

Deadweight Loss

answer

The fall in total surplus that results from a market distortion, such as a tax
-because of the tax, the units in the deadweight loss are unable to be sold (the value of these units to buyers is greater than the cost of producing them)

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What determines the size of the DWL?

answer

-tax the goods and services with the smallest DWL
-the size of the DWL is small vs. large depending on the elasticity of supply and demand

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DWL and the elasticity of supply

answer

When supply is inelastic, it's harder for firms to leave the market
-the tax only reduces Q a small distortion and DWL is small
The more elastic the supply, the easier for firms to leave the market
-large distortion, greater DWL

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DWL and the elasticity of demand

answer

When demand is inelastic, it's harder for consumers to leave the market
-tax only reduces a little (small distortion, DWL is small
When the demand is more elastic, the easier it is for buyers to leave the market
-large distortion, DWL is greater

question

Government's Tax Revenue

answer

Represented by the rectangle between the supply curve and the demand curve

question

Without a Tax

answer

Without a tax, the equilibrium would be found at the intersection of the supply and demand curves

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Consumer Surplus location

answer

The area between the demand curve and the price

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Producer Surplus location

answer

The area between the supply curve and the price

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How big should the government be?

answer

A bigger government provides more services, but requires higher taxes, which cause DWL's
-The larger the DWL from taxation, the greater the argument for smaller government

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Revenue and the size of the tax

answer

When the tax is larger, increasing it will cause the tax revenue to fall

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Laffer curve

answer

Shows the relationship between the size of the tax and tax revenue
-Low level of taxes will increase tax revenue
-High taxes and continuing to increase them will continue to decrease tax revenue

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Subsidy

answer

Reducing the input costs of a good (shifts the supply curve)
-distorts the market by increasing the quantity bought and sold
-benefits both the producer and the consumer
-the opposit

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Summary

answer

A tax on a good reduced the welfare of buyers and sellers
-this welfare loss usually exceeds the revenue the tax raises for the gov't
-the fall in total surplus is the called the deadweight loss of the tax
-DWL causes consumers to buy less and producers to sell less thus shrinking the market below the level htat maximizes total surplus

1 of 14

question

The Effects of a Tax

answer

Tax revenue can fund beneficial services (e.g. education, roads, police), so we include it in total surplus

question

Deadweight Loss

answer

question

What determines the size of the DWL?

answer

-tax the goods and services with the smallest DWL
-the size of the DWL is small vs. large depending on the elasticity of supply and demand

question

DWL and the elasticity of supply

answer

question

DWL and the elasticity of demand

answer

question

Government's Tax Revenue

answer

Represented by the rectangle between the supply curve and the demand curve

question

Without a Tax

answer

Without a tax, the equilibrium would be found at the intersection of the supply and demand curves

question

Consumer Surplus location

answer

The area between the demand curve and the price

question

Producer Surplus location

answer

The area between the supply curve and the price

question

How big should the government be?

answer

A bigger government provides more services, but requires higher taxes, which cause DWL's
-The larger the DWL from taxation, the greater the argument for smaller government

question

Revenue and the size of the tax

answer

When the tax is larger, increasing it will cause the tax revenue to fall

question

Laffer curve

answer

Shows the relationship between the size of the tax and tax revenue
-Low level of taxes will increase tax revenue
-High taxes and continuing to increase them will continue to decrease tax revenue

question

Subsidy

answer

Reducing the input costs of a good (shifts the supply curve)
-distorts the market by increasing the quantity bought and sold
-benefits both the producer and the consumer
-the opposit

question

Summary

answer

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Ch. 8 Microeconomics

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