Deck 8: Application: the Costs of Taxation

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Suppose the supply curve becomes more inelastic, but nothing else changes.This implies that the deadweight loss of a tax will be smaller.

Question 8

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 9

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

Question 10

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.

Question 11

Often the tax revenue collected by the government equals the reduced welfare of buyers and sellers caused by the tax.

Question 12

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 13

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

Question 14

Economists disagree on whether labour taxes have a small or a large deadweight loss.

Question 15

One result of a tax on a good is that the equilibrium quantity sold tends to rise.

Question 16

Taxes cause deadweight losses because they prevent buyers and sellers from realising some of the gains from trade.

Question 17

If the supply of labour is inelastic, the deadweight loss from labour taxes is large.

Question 18

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

Question 19

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 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

As the size of the tax increases, tax revenue will always increase.

Question 28

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

Question 29

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 30

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

Question 31

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 32

Taxes are costly to market participants because they transfer resources from those participants to the government, even though they do not usually distort incentives or resource allocation.

Question 33

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

Question 34

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.

Question 35

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

Question 36

If the size of a tax doubles, the deadweight loss rises by a factor of six.

Question 37

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 38

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 39

The deadweight loss of a tax rises even more rapidly than the size of the tax.

Question 40

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

Question 41

NARRBEGIN: 8-2
Graph 8-2 This graph shows supply and demand in a free market.
According to Graph 8-2, total economic surplus would be represented by area:

A)A + B
B)B + C
C)C + D
D)A + D

Question 42

NARRBEGIN: 8-1
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 43

NARRBEGIN: 8-1
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 44

NARRBEGIN: 8-2
Graph 8-2 This graph shows supply and demand in a free market.
According to Graph 8-2, when the market is in equilibrium, producer surplus is represented by area:

A)A
B)B
C)C
D)D

Question 45

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 46

NARRBEGIN: 8-1
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 47

NARRBEGIN: 8-1
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 48

NARRBEGIN: 8-1
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 49

NARRBEGIN: 8-1
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 50

NARRBEGIN: 8-1
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 51

NARRBEGIN: 8-1
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 52

NARRBEGIN: 8-2
Graph 8-2 This graph shows supply and demand in a free market.
According to Graph 8-2, if the market is in equilibrium, consumer surplus is represented by area:

A)A
B)B
C)C
D)D

Question 53

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 54

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 55

NARRBEGIN: 8-1
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 56

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 57

NARRBEGIN: 8-1
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 58

NARRBEGIN: 8-1
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 59

NARRBEGIN: 8-1
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 60

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 61

When a tax is levied on the sellers of a good, the supply curve:

A)shifts right and down by less than the tax
B)shifts left and up by an amount equal to the tax
C)shifts left and down by an amount less than the tax
D)shifts right and up by an amount equal to the tax

Question 62

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, the price buyers pay after the tax is:

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

Question 63

Suppose a tax is imposed on a good, this generates a loss in total surplus called:

A)opportunity cost
B)tax evasion
C)deadweight loss
D)public sector employee wages

Question 64

Suppose a tax is placed on wine, this will mean:

A)the quantity of wine sold in the market will be unchanged because wine has perfectly inelastic supply
B)the tax will be entirely passed on to the buyers
C)the quantity of wine sold in the market will fall
D)the tax will be paid entirely by the sellers

Question 65

When a tax is levied on a good:

A)the market price falls because demand declines
B)the market price falls because supply falls
C)a wedge is placed between the price buyers pay and the price sellers receive
D)the market price rises because demand falls

Question 66

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, the reduction in consumer surplus caused by the tax is:

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

Question 67

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, the reduction in producer surplus caused by the tax is:

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

Question 68

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, consumer surplus before the tax is levied equals:

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

Question 69

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, the price sellers receive after the tax is:

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

Question 70

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 71

The benefit received by buyers in the market for good X is measured by:

A)the market price
B)the total expenditure of buyers
C)consumer surplus
D)the total cost to sellers of producing the good X

Question 72

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, producer surplus before the tax equals:

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

Question 73

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, the benefits to the government (total tax revenue) is:

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

Question 74

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, after the tax is levied, consumer surplus is:

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

Question 75

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 in excess of the amount the good is actually worth
D)the amount it costs producers to produce the good

Question 76

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 77

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 78

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, after the tax is levied, producer surplus is:

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

Question 79

NARRBEGIN: 8-3 Graph 8-3
According to Graph 8-3, the equilibrium market price before the tax is imposed is:

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

Question 80

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