Multiple Choice
Suppose that a unit tax of $2 is imposed on producers with initial equilibrium of $10. If the demand curve is vertical and the supply curve is upward-sloping, what will be the price faced by consumers after the tax?
6. Introduction to Taxes
Elasticity and Taxes
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A tax imposed on consumers of a good:
A
Creates a loss only for consumers
B
Creates a loss only for producers
C
Creates a deadweight loss for society as a whole
D
Creates a net gain for society as a whole
Verified step by step guidance1
Understand the concept of a tax imposed on consumers: When a tax is levied on consumers, it increases the price they pay for a good or service. This can lead to a decrease in the quantity demanded.
Analyze the impact on consumers: Consumers face a higher price, which reduces their consumer surplus. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
Analyze the impact on producers: Producers may receive a lower effective price for their goods, reducing their producer surplus. Producer surplus is the difference between what producers are willing to accept and what they actually receive.
Define deadweight loss: Deadweight loss is the loss of economic efficiency that occurs when the equilibrium outcome is not achieved. It represents the total loss of surplus (both consumer and producer) that is not offset by a gain elsewhere.
Conclude with the societal impact: The tax creates a deadweight loss for society as a whole because the reduction in consumer and producer surplus is not fully compensated by the tax revenue collected by the government. This results in a net loss of welfare in the market.
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