Application: The Costs of Taxation 2211
56. The optimal tax is difficult to determine because although revenues rise and fall as the size of the
tax increases, deadweight loss continues to increase.
a. True
b. False
57. Suppose that a university charges students a $100 “tax” to register for business classes. The next
year the university raises the “tax” to $150. The deadweight loss from the “tax” triples.
a. True
b. False
58. Economists dismiss the idea that lower tax rates can lead to higher tax revenue, because there is
a consensus that the relevant elasticities of demand and supply are very low.
a. True
b. False
2212 Application: The Costs of Taxation
59. When the government imposes taxes on buyers and sellers of a good, society loses some of the
benefits of market efficiency.
a. True
b. False
Application: The Costs of Taxation 2213
60. Suppose the government levies a tax of the vertical distance from point A to point B. Using the
graph shown, determine the value of each of the following:
a. equilibrium price before the tax
b. consumer surplus before the tax
c. producer surplus before the tax
d. total surplus before the tax
e. consumer surplus after the tax
f. producer surplus after the tax
g. total tax revenue to the government
h. total surplus (consumer surplus+producer surplus+tax revenue) after the tax
i. deadweight loss
2214 Application: The Costs of Taxation
61. John has been in the habit of mowing Willa’s lawn each week for $20. John’s opportunity cost is
$15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax
the government can impose on lawn mowing without discouraging John and Willa from continuing
their mutually beneficial arrangement?
62. Use the following graph shown to fill in the table that follows.
WITHOUT TAX
WITH TAX
CHANGE
Consumer surplus
Producer surplus
Tax revenue
Total surplus
Application: The Costs of Taxation 2215
63. Suppose that instead of a supply-demand diagram, you are given the following information:
Qs = 100 + 3P Qd = 400 – 2P
From this information compute equilibrium price and quantity. Now suppose that a tax is placed on
buyers so that
Qd = 400 – 2(P + T).
If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers
and P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity
with your first answers. What does this show you?
2216 Application: The Costs of Taxation
64. Using demand and supply diagrams, show the difference in deadweight loss between (a) a market
with inelastic demand and supply and (b) a market with elastic demand and supply.
Application: The Costs of Taxation 2217
65. Illustrate on three demand-and-supply graphs how the size of a tax (small, medium and large) can
alter total revenue and deadweight loss.
2218 Application: The Costs of Taxation
Problems
1. In terms of gains from trade, why is it true that taxes cause deadweight losses?
2. A tax is imposed on a certain good. The tax produces revenue of $5,000 for the government. The
tax reduces consumer surplus by $3,000 and it reduces producer surplus by $4,000. What is the
amount of the deadweight loss of the tax?
Application: The Costs of Taxation 2219
Figure 8-25
3. Refer to Figure 8-25. What are the equilibrium price and equilibrium quantity in this market?
4. Refer to Figure 8-25. How much is consumer surplus at the market equilibrium?
2220 Application: The Costs of Taxation
5. Refer to Figure 8-25. How much is producer surplus at the market equilibrium?
6. Refer to Figure 8-25. How much is total surplus at the market equilibrium?
7. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. What price
will consumers pay for the good after the tax is imposed?
8. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. What price
will sellers receive for the good after the tax is imposed?
Application: The Costs of Taxation 2221
9. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. How many
units of this good will be bought and sold after the tax is imposed?
10. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. How much
is consumer surplus after the tax is imposed?
11. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. How much
is producer surplus after the tax is imposed?
2222 Application: The Costs of Taxation
12. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. How much
tax revenue is collected after the tax is imposed?
13. Refer to Figure 8-25. Suppose the government increases the size of the tax on this good from
$4 per unit to $6 per unit. Will the tax revenue collected from the tax increase, decrease, or stay
the same?
14. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. How much
is total surplus after the tax is imposed?
Application: The Costs of Taxation 2223
15. Refer to Figure 8-25. Suppose the government places a $4 tax per unit on this good. How much
is the deadweight loss from this tax?
Scenario 8-3
Suppose the market demand and market supply curves are given by the equations:
16. Refer to Scenario 8-3. What are the equilibrium price and equilibrium quantity in this market?
2224 Application: The Costs of Taxation
17. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
What price will sellers receive and what price will buyers pay after the tax is imposed?
18. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
What quantity will be bought and sold after the tax is imposed?
Application: The Costs of Taxation 2225
19. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
How much tax revenue will be collected after this tax is imposed?
20. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
What will be the deadweight loss from this tax?
2226 Application: The Costs of Taxation
21. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
If T = 40, what price will buyers pay and what price will sellers receive?
22. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
If T = 40, how many units will be bought and sold after the tax is imposed?
Application: The Costs of Taxation 2227
23. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
If T = 40, how much tax revenue will be collected from this tax?
24. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
If T = 40, how much is the burden of the tax on the buyers and on the sellers?
25. Refer to Scenario 8-3. Suppose that a tax of T is placed on buyers so that the demand curve
becomes:
If T = 40, how much will be the deadweight loss from this tax?