Figure 8-17
The vertical distance between points A and B represents the original tax.

-Refer to Figure 8-17.The original tax can be represented by the vertical distance AB.Suppose the government is deciding whether to lower the tax to CD or raise it to FG.Which of the following statements is correct?

Question

Figure 8-17
The vertical distance between points A and B represents the original tax.
 
-Refer to Figure 8-17.The original tax can be represented by the vertical distance AB.Suppose the government is deciding whether to lower the tax to CD or raise it to FG.Which of the following statements is correct?

Quizplus · Accepted Answer

A larger tax than the original tax (represented by AB) is represented by FG, which is higher vertically than AB. Increasing the tax to FG will result in a decrease in tax revenue (as the demand for the taxed product will decrease due to the higher price) and an increase in deadweight loss (as consumers are more sensitive to the increased price). Therefore, Option C is the correct statement. Option A is incorrect as it suggests that an increase in tax will decrease deadweight loss, which is contrary to the law of demand. Option B is incorrect as a smaller tax than the original tax (represented by CD) will decrease tax revenue and deadweight loss as a lower tax will not incentivize consumers to buy more and producers to produce more.

Figure 8-17 the Vertical Distance Between Points a and B Represents the Represents