Deck 8: Application: the Costs of Taxation

Question 1

When a tax is imposed on a market, the government collects revenues. These revenues however, are less than the loss in consumer surplus and producer surplus.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Labour taxes encourage workers to work fewer hours, second earners to stay at home, the elderly to retire early, and the unscrupulous to engage in illegal activities.

Question 5

There is little evidence that the Australian economy is currently in the downward sloping section of the Laffer curve.

Question 6

Suppose the demand curve becomes more elastic, but nothing else changes, this implies that the deadweight loss from a given tax will be smaller.

Question 7

The deadweight loss of a tax increases as demand and supply curves become more inelastic.

Question 8

Taxes cause inefficiencies only when government revenue is less than the deadweight loss.

Question 9

When a tax is levied on a good it usually leads to a change in quantity demanded. All else equal, this change in quantity will be greater the more inelastic the demand curve.

Question 10

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

Question 11

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

Question 12

If demand is more inelastic than supply, levying a tax on demand will minimise the deadweight loss.

Question 13

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

Question 14

The deadweight loss of a tax is the reduction in total surplus in excess of the tax revenue collected that results from the tax.

Question 15

A tax on insulin is likely to cause a tremendous deadweight loss to society.

Question 16

A tax on luxuries will create a smaller deadweight loss than will the same tax on necessities, ceteris paribus.

Question 17

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

Question 18

The effect of a tax on a good makes both sellers and buyers better off.

Question 19

One of the important economic costs of imposing taxes on a market is the deadweight loss.

Question 20

A source of the deadweight loss of taxation is the inefficient use of tax revenue by the government.

Question 21

If an economy is on the downward sloping section of the Laffer curve, then decreasing taxes would lead to an increase in tax revenue.

Question 22

A tax levied on the supplier of a product shifts the demand curve downward or to the left.

Question 23

Graph 8-1

According to Graph 8-1, consumer surplus before the tax was levied is represented by area:

A) A
B) A + B + C
C) D + E + F
D) F

Question 24

To evaluate the welfare effects of taxes on economic activity, economists:

A) do nothing because taxes provide public services that are always valued
B) measure changes to consumer and producer surplus
C) measure changes to equilibrium price and quantity
D) measure expenditures on social welfare by the government

Question 25

Graph 8-1

According to Graph 8-1, the equilibrium market price before the tax is imposed is:

A) P₃
B) P₂
C) P₁
D) impossible to determine

Question 26

Graph 8-1

According to Graph 8-1, the price sellers receive after the tax is:

A) P₃
B) P₂
C) P₁
D) impossible to determine

Question 27

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

Question 28

Government revenue from a tax equals the sum of the lost producer surplus and lost consumer surplus.

Question 29

Graph 8-1

According to Graph 8-1, the price buyers pay after the tax is:

A) P₃
B) P₂
C) P₁
D) impossible to determine

Question 30

Revenue from a tax accruing to Government detracts from total welfare.

Question 31

A tax on unimproved land falls entirely on landowners, because the supply of land is perfectly inelastic.

Question 32

The deadweight loss of taxation may be less than supply and demand analysis suggests as some economic activity may be forced "under the table" where it is not counted in official figures.

Question 33

A tax levied on the supplier of a product shifts the:

A) supply curve upwards or to the left
B) supply curve downwards or to the right
C) demand curve upwards or to the right
D) demand curve downwards or to the left

Question 34

When a tax is levied on the sellers of a good:

A) both buyers and sellers are economically worse off
B) only sellers are worse off because they have to pay the tax
C) only buyers are worse off because sellers pass the tax on to them
D) there is no change because sellers will produce a different good for buyers to purchase

Question 35

Taxes on land are relatively efficient as the supply of land is inelastic.

Question 36

A tax on land will distort economic incentives unless the tax applies only to raw (unimproved) land.

Question 37

A tax on a good:

A) raises the price buyers pay and lowers the price sellers receive
B) raises the price buyers pay and raises the price sellers receive
C) lowers the price buyers pay and lowers the price sellers receive
D) lowers the price buyers pay and raises the price sellers receive

Question 38

Graph 8-1

According to Graph 8-1, producer surplus before the tax is represented by area:

A) A
B) A + B + C
C) D + E + F
D) F

Question 39

When a tax is levied on a good buyers are worse off but not sellers.

Question 40

A tax levied on the buyers of a product shifts the:

A) supply curve upwards or to the left
B) supply curve downwards or to the right
C) demand curve upwards or to the right
D) demand curve downwards or to the left

Question 41

Graph 8-1

According to Graph 8-1, the total surplus (consumer, producer, and government) with the tax is represented by area:

A) A + B + C
B) D + E + F
C) A + B + D + F
D) C + E

Question 42

Graph 8-1

According to Graph 8-1, the benefits to the government (total tax revenue) is represented by area:

A) A + B
B) B + D
C) D + F
D) C + E

Question 43

Deadweight loss is the:

A) reduction in total surplus that results from a tax
B) loss of profit to businesses when a tax is imposed
C) reduction in consumer surplus when a tax is placed on buyers
D) decline in government revenue when taxes are reduced in a market

Question 44

The appropriate measure of the benefit from a tax is the:

A) consumer surplus
B) benefit received by those people who gain from government's expenditure of the tax revenue
C) producer surplus
D) government's budget balance, which is increased with more taxes

Question 45

Graph 8-2

According to Graph 8-2, consumer surplus before the tax is levied equals:

A) $750
B) $3000
C) $1125
D) $1500

Question 46

Graph 8-2

According to Graph 8-2, the price sellers receive after the tax is:

A) $5
B) $10
C) $15
D) $20

Question 47

Graph 8-1

According to Graph 8-1, the tax caused a reduction in consumer surplus, it is represented by area:

A) A
B) B + C
C) D + E
D) F

Question 48

Graph 8-1

According to Graph 8-1, after the tax is levied, consumer surplus is represented by area:

A) A
B) A + B + C
C) D + E + F
D) F

Question 49

Graph 8-2

According to Graph 8-2, the price buyers pay after the tax is:

A) $5
B) $10
C) $15
D) $20

Question 50

Graph 8-2

According to Graph 8-2, the reduction in consumer surplus caused by the tax is:

A) $750
B) $1125
C) $375
D) $1000

Question 51

The benefit received by the sellers of a good in a market is measured by:

A) consumer surplus
B) producer surplus
C) the amount buyers pay for the good
D) the amount it costs to produce the good

Question 52

Graph 8-2

According to Graph 8-2, producer surplus before the tax equals:

A) $750
B) $3000
C) $1125
D) $1500

Question 53

The benefit received by the government from a tax is measured by:

A) deadweight loss
B) tax revenue
C) equilibrium price
D) total surplus

Question 54

Graph 8-2

According to Graph 8-2, after the tax is levied, producer surplus is:

A) $375
B) $750
C) $1500
D) $1125

Question 55

Graph 8-1

According to Graph 8-1, the loss in total welfare resulting from the levying of the tax is represented by area:

A) A + B + C
B) C + E
C) D + E + F
D) A + B + D + F

Question 56

Graph 8-1

According to Graph 8-1, after the tax is levied, producer surplus is represented by area:

A) A
B) A + B + C
C) D + E + F
D) F

Question 57

When a tax on a good is enacted:

A) buyers always bear the full burden of the tax
B) sellers always bear the full burden of the tax
C) buyers and sellers share the burden of the tax regardless of whom it is levied on
D) sellers bear the full burden if the tax is levied on them, but buyers bear the full burden if the tax is levied on them

Question 58

Graph 8-2

According to Graph 8-2, after the tax is levied, consumer surplus is:

A) $375
B) $750
C) $1500
D) $1125

Question 59

Graph 8-2

According to Graph 8-2, the equilibrium market price before the tax is imposed is:

A) $5
B) $10
C) $15
D) $20

Question 60

Graph 8-1

According to Graph 8-1, the tax caused a reduction in producer surplus, it is represented by area:

A) A
B) B + C
C) D + E
D) F

Question 61

Assume that a tax is levied on a good and the government uses the revenue to clean up lethal toxic waste that would cause irreparable harm to a large number of people. In this case there would be:

A) a decrease in consumer surplus to consumers of the taxed good
B) a decrease in producer surplus to producers of the taxed good
C) a probable increase in the total economic welfare of society
D) all of the above would occur

Question 62

Graph 8-2

According to Graph 8-2, the amount of deadweight loss in this market resulting from the levying of the tax is:

A) $1500
B) $1125
C) $375
D) $750

Question 63

'Assume that the demand for entertainment is more elastic than the demand for petrol'.
According to this statement, the tax levied on entertainment will cause the loss of consumer surplus to be:

A) zero
B) relatively large
C) relatively small
D) either small or large (depending on the elasticity of supply)

Question 64

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'. According to this statement, a tax levied on coffee will cause the loss of producer surplus to be:

A) relatively large
B) relatively small
C) zero
D) either small or large, depending on the elasticity of demand

Question 65

'Assume that the demand for entertainment is more elastic than the demand for petrol'.
According to this statement, compared to the decline in purchases from a similar percentage tax on petrol, we would expect that a tax on entertainment will cause the quantity of entertainment purchased to decline:

A) more
B) less
C) the same
D) neither more nor less

Question 66

The amount of deadweight loss from taxes depends on:

A) the price elasticity of demand and supply
B) how much of the tax revenue the government plans to spend
C) the product the government is planning to tax
D) all of the above are correct

Question 67

'Assume that the demand for entertainment is more elastic than the demand for petrol'.
According to this statement, a tax levied on petrol will cause the loss of consumer surplus to be:

A) zero (because raising the price of gasoline has no effect on the amount purchased)
B) relatively large
C) relatively small
D) either small or large (depending on the elasticity of supply)

Question 68

The marginal tax rate on labour income for many workers in Australia is almost:

A) 30 per cent
B) 40 per cent
C) 50 per cent
D) 60 per cent

Question 69

Graph 8-2

According to Graph 8-2, the benefits to the government (total tax revenue) is:

A) $1500
B) $750
C) $1125
D) $375

Question 70

According to the information provided, the total gain in welfare due to the transaction described here is:

A) $15 per week
B) $65 per week
C) $50 per week
D) $45 per week

Question 71

Graph 8-2

According to Graph 8-2, the total surplus (consumer, producer and government) with the tax is:

A) $2250
B) $1500
C) $1875
D) $1125

Question 72

The greater the elasticities of demand and supply the:

A) smaller the deadweight loss from a tax
B) less intrusive a tax will be on a market
C) greater the deadweight loss from a tax
D) more equitable the distribution of a tax between buyers and sellers

Question 73

Graph 8-2

According to Graph 8-2, the total surplus (consumer, producer and government) before the tax is:

A) $6000
B) $3000
C) $1500
D) $750

Question 74

Suppose the Government is looking to raise revenue by taxing a market and has hired you for advice on minimising the deadweight loss of taxation. In identifying which market to tax, you would advise the government to choose a market where:

A) supply is highly inelastic and demand is elastic
B) supply is highly elastic and demand is inelastic
C) any market where both supply or demand is highly inelastic
D) any market where both supply or demand is highly elastic

Question 75

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'. According to this statement, suppose both forest products and coffee have the same percentage tax applied to them, the fall in quantity supplied of forest products will be:

A) more than the fall in quantity supplied of coffee
B) less than the fall in quantity supplied of coffee
C) equal to the fall in quantity supplied of coffee
D) either more or less than the fall in quantity supplied of coffee, depending on the elasticity of demand

Question 76

According to the information provided, what will be Don's gain in consumer surplus as a result of the proposed transaction?

A) Don will gain $15 per week
B) Don will gain $45 per week
C) Don will gain $35 per week
D) Don will gain not consumer surplus

Question 77

Suppose supply is perfectly inelastic, while demand is relatively elastic. A tax of $1.00 is levied on the purchasers of the good. Which of the following statements is correct?

A) the government will fail to raise any tax revenue
B) there will be a positive deadweight loss
C) there will be no deadweight loss
D) government revenue will be less than the deadweight loss of the tax.

Question 78

Graph 8-2

According to Graph 8-2, the reduction in producer surplus caused by the tax is:

A) $750
B) $1125
C) $375
D) $1000

Question 79

Assume that the demand for salt is relatively inelastic and the demand for orange juice is relatively elastic. Compared to the deadweight loss from the same percentage tax on orange juice, the deadweight loss from imposing a tax on salt would be:

A) greater
B) lesser
C) neither greater nor lesser
D) either greater or lesser

Question 80

According to the information provided, what will be Phil's gain in producer surplus as a result of the proposed transaction?

A) Phil will gain $30 per week
B) Phil will gain $15 per week
C) Phil will gain $45 per week
D) Phil will gain no producer surplus