Suppose the government increases the size of a tax by 40 percent.The deadweight loss from that tax
A) increases by 40 percent.
B) increases by more than 40 percent.
C) increases but by less than 40 percent.
D) decreases by 40 percent.

Question

Quizplus · Accepted Answer

The deadweight loss from a tax increases as the size of the tax increases, but the relationship is not linear. As the tax rate increases, the distortionary effects on behavior become more significant, leading to a larger increase in deadweight loss than the increase in the tax rate itself. Therefore, a 40 percent increase in the size of the tax would lead to an increase in deadweight loss that is greater than 40 percent.

Suppose the Government Increases the Size of a Tax by 40